VATSC06585 - Consideration: Payments that are not consideration: Payments in specific sectors: Carbon offsetting: Offsetting services

There are a growing number of businesses providing carbon offsetting services. The range of services offered varies widely, but the VAT treatment of any individual transaction will depend on the particular arrangements.

In many situations, when a member of the public makes a payment to a carbon offset provider, there is no supply for VAT purposes. This is because there is no identifiable, direct benefit being received by the member of the public in return for their money and they are simply making a donation.

Examples would be where a carbon offset provider makes a commitment that funds paid across by members of the public will be used to fund overseas projects, wind farms, development of environmentally friendly energy generation projects and the like without making any supply of direct benefit to the person making the payment. In such scenarios the payment by the member of the public is outside the scope of VAT.

A common arrangement is where an airline offers its passengers the facility to offset the carbon emissions generated by their flights, perhaps via a third party carbon offset provider. Generally, the passenger pays across an amount, calculated to be the cost of offsetting the resulting emissions, but receives no identifiable, direct benefit in return. There are a number of possible variants, including where

  • the passenger is obliged to pay the offsetting charge, the airline is making a single zero rated supply of transport services
  • the offsetting charge is optional, the offsetting charge would be a separate standard rated supply if there is a specific supply made for consideration. If separate administration charges are made for providing this service, these will also be standard rated

In other situations, a carbon offset provider might make taxable supplies of carbon credits, or of the purchase and ‘retirement’ of carbon credits, or of general advice on how an individual or a business can improve its energy efficiency. These will all be standard rated.

Donations made towards off-setting projects are not consideration for any supply and so remain outside the scope of VAT (see VATSC06110)