Carousel Fraud and Emissions Trading: Assistance in a dispute over VAT on emissions allowances

The Situation

In the first half of 2009, the European Union's Emissions Trading System for greenhouse gases was hit by allegations of large-scale "carousel fraud" relating to VAT payments for emissions allowances traded on the spot market.

NERA's client, along with many other active participants in the carbon emissions trading market, acquired emissions trading allowances in supply chains which were alleged to be tainted with fraud (broadly where the chain had commenced with importation of the allowances by a missing trader). Even though not party to the fraud themselves, they would have been denied their right to deduct the input VAT they paid their suppliers if it could be shown that they knew, or should have known, that the supply chain was vitiated by VAT fraud. As evidence that NERA's client should have known of the alleged fraud, Her Majesty's Revenue and Customs (HMRC) cited the high volumes of trade in the market as well as a spike in trade that HMRC claimed had no other explanation in a market that they asserted ought not to be "volatile" -- although HMRC provided no justification for this claim.

Based on these allegations, HMRC sought to refuse to allow NERA's client to deduct the input VAT paid on the purchase of certain emission rights from its overall VAT liability, demanding additional payments totalling tens of millions of pounds.

NERA's Role

NERA was retained by Counsel to provide background on the EU emissions markets and to analyse the trading activity at the centre of HMRC's claim.

The Result

By providing a comprehensive overview of the relevant markets, a summary of what participants knew at the time, and by a detailed analysis of the trading activity in question, NERA provided valuable support in negotiation with HMRC.

NERA's analysis helped to establish a common understanding of the economics of the market and the way it developed, allowing our client to improve HMRC's appreciation of the market context, and thereby providing a more favourable result for our client.

Following NERA’s analysis, HMRC dramatically reduced its claim for unpaid tax. The client reported that NERA’s report was “extremely helpful in setting out a clear position about the state of the market and the knowledge and understanding of market participants at the time."