A Guide to the Evolving VAT for Voluntary Carbon Credits in the UK

Voluntary carbon credits now sit in a very different VAT position in the UK. For years, HMRC treated most voluntary credits outside the scope of VAT, which created uncertainty for project developers, traders and UK carbon offset providers. That view changed in 2024. From 1 September 2024, most trades in fall within UK VAT for voluntary carbon credits, usually at the standard rate of 20%, where the place of supply is the UK

We at Apex Accountants support many environmental projects and carbon offset platforms. This guide explains what has changed, which transactions still sit outside VAT, and how UK carbon offset providers can respond in a practical way.

From “outside the scope” to taxable supplies

HMRC reviewed the voluntary carbon market after strong growth in secondary trading and corporate offset activity. Revenue and Customs Brief 7 (2024) confirmed a clear shift. Previously, HMRC viewed voluntary credits often as linked to non-business activity, so income often sat outside VAT. 

Now HMRC accepts that voluntary credits can form part of economic activity within a normal supply chain. Due to this shift, from 1 September 2024: 

• Most sales of voluntary carbon credits by UK suppliers are taxable at 20%.
• Zero rating can apply where trades fall within the Terminal Markets Order on specified commodity exchanges.

For many UK carbon offset providers, this change removes ambiguity but creates new compliance duties.

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When VAT For Voluntary Carbon Credits Apply

In simple terms, VAT charges on carbon credits apply where:

• A business supplies voluntary carbon credits for consideration.
• The place of supply rules point to the UK.
• The credits meet HMRC’s definition, including third-party verification.

Typical scenarios within VAT at 20% include:

• UK project developers selling verified credits to UK corporates.
• Platforms and brokers selling verified credits to UK businesses or consumers.
• UK intermediaries buying and reselling verified credits in a secondary market.

Where trades occur on specified commodity exchanges that fall within the Terminal Markets Order, the supplies can be zero rated. VAT treatment of voluntary carbon credits mainly benefits wholesale participants rather than retail offset schemes. 

Transactions that still sit outside UK VAT

Not every activity linked to voluntary carbon credits creates a taxable supply. HMRC guidance explains that certain transactions remain outside the scope, including:

• First issue of a voluntary carbon credit by a public authority.
• Holding credits purely for investment with no economic activity.
• Donations to projects where the donor receives no direct benefit.
• Sales of credits from self-assessed schemes without independent verification.

For UK carbon offset providers, these distinctions matter. A single project can involve both out-of-scope income and taxable supplies, depending on how credits are verified, marketed and sold. Clear contracts and documentation become critical.

Place of supply, cross-border trades and reverse charge

From a VAT perspective, voluntary carbon credits are now subject to the standard place of supply rules.

Key points for UK carbon offset providers:

UK supplier to UK business or consumer

• Place of supply is the UK.
• VAT at 20% unless a specific relief applies.

UK supplier to non-UK business

• Place of supply often sits outside the UK for B2B digital or service-type supplies.
• The overseas customer may account for VAT under reverse charge in its own country.

Non-UK supplier to UK business

• Reverse charge usually applies in the UK.
• The UK business records both output tax and input tax, subject to its recovery position.

Providers that trade credit with customers in several jurisdictions should map their supply chains carefully and review their invoicing, tax codes, and contractual terms.

Practical VAT Challenges for UK Carbon Offset Providers

The move from outside-scope treatment to taxable supplies creates several practical issues. Key pressure points include:

• Pricing and contracts
  • If contracts quote a single price without mentioning VAT, that price may be treated as inclusive.
  • Providers then need to fund the VAT from the agreed sum, which cuts margins.
    
• VAT registration and partial exemption
  • Project developers and platforms that previously fell below thresholds may now cross them.
  • Businesses with exempt income, for example from financial services or property, may only recover part of the VAT charge on carbon credits.
    
• Evidence and verification
  • VAT treatment of voluntary carbon credits can depend on independent verification status.
  • Providers need clear records that show whether credits qualify as verified voluntary credits or sit outside VAT.
    
• Systems and tax codes
  • Accounting software must distinguish between standard-rated credits, zero-rated terminal market trades and out-of-scope activities.
  • Poor mapping can lead to misstatements on VAT returns.

Action plan for UK carbon offset providers

We, at Apex Accountants, suggest a structured review for any business that creates, trades, or sells voluntary carbon credits:

1. Map your activities
   
   • List all income streams linked to carbon credits.
   • Identify which fall within VAT at 20%, which qualify for zero rate and which remain outside scope.
     
2. Review contracts and pricing
   
   • Update terms to state whether prices are inclusive or exclusive of VAT.
   • Make sure contracts for future vintages and pending issuance units encompass VAT explicitly.
     
3. Check VAT registration and recovery
   
   • Confirm whether you now need VAT registration or group registration.
   • Review partial exemption methods where you have both taxable and exempt activities.
     
4. Update systems and controls
   
   • Align accounting systems, tax codes and reports with the new rules.
   • Train the finance and commercial teams so they recognise the VAT implications during deal negotiations.

How Apex Accountants can help

Voluntary carbon markets play an important role in corporate climate commitments, yet VAT treatment has moved quickly. Many UK carbon offset providers now face higher compliance risk and potential hidden costs.

Apex Accountants supports project developers, platforms, traders, and corporations that purchase credits for offset programmes. We help clarify VAT treatments, design practical controls, prepare or review VAT returns, and facilitate dialogue with HMRC where required.

If your organisation generates, trades, or purchases voluntary carbon credits, our team can provide clear, sector-focused advice on the new VAT rules and help you structure your activities in a compliant and efficient manner.