201509 CM September

LEGAL COLUMN
CAROUSEL
FRAUD
Peter Walker highlights a case where the judges of the
Supreme Court outsmarted the miscreants.
THE Financial Conduct Authority
warns people to beware of
companies and others offering
investments in carbon credits, and
some of those involved have gone out of
business leaving their investors without
redress. Although trading in carbon credits
can be a legitimate business, a recent case
illustrates that some people are using their
own companies to commit VAT fraud.
The judges of the Supreme Court had to
consider those seamier aspects of carbon
credits in Bilta (UK) Ltd v Nazir (No 2) [2015]
2 WLR 1168. Carbon credits ostensibly
were the worthy result of the Kyoto Protocol
of 1997, which intended to reduce the
emission of carbon into the atmosphere. A
company, for example, which reduced its
greenhouse gas emissions is given a credit
in accordance with a formula. It can sell
that credit to another business, which is
exceeding its quota. So-called ‘developing
countries’ with high emissions can buy
those credits from those ‘developed
countries’ successfully reducing those
emissions.
The system is complicated, one cause
of criticism, and in September 2009 the
Department for Environment, Food and
Rural Affairs (DEFRA) issued ‘Guidance
on how to measure and report your
greenhouse gas emissions’. A business,
and according to the Guidance it can be as
small as a bed-and-breakfast enterprise,
has to identify those of its activities
releasing greenhouse gas emissions into
the atmosphere, and then to calculate
them. It has to do various computations,
set targets for its emissions, and report
accordingly.
There are accounting implications
as mentioned in the Guidance and in
‘Accounting for Carbon’, a report issued
by the Association of Chartered Certified
Accountants (ACCA) in 2010. One of the
findings of that report was that ‘large
emitters in the EU ETS (European Union
Emissions Trading System) are using
a diversity of accounting practices in
accounting for emission allowances: there
is no uniformity of treatment.’ That it not
helpful to those people, such as credit
managers, who analyse accounts and in
particular balance sheets, so they should
carefully read the explanatory notes in the
financial statements.
There is a resulting financial market for
carbon credits. The European Investment
Bank, for example, sponsors some carbon
funds ‘to further the climate change
objectives of the EU’ according to its
‘Frequently Asked Questions’ on the topic.
One factor in the debate is that the saving
of one carbon credit may be purchased
by another business to cover its excessive
emissions with the result that there is no
overall reduction.
There is furthermore a seamier side of
the trade, in that the Financial Conduct
Authority advises the general public, i.e.
you and me, ‘to avoid investing in carbon
credits and related markets.’ It is ‘most
likely a scam.’
GET OFF THE CAROUSEL!
Another fraudulent activity is that of the
carousel, which was originally used in the
context of the import and export of mobile
phones. A business would import from
another company in the European Union
(EU) a VAT-free consignment of them. The
business would sell the consignment to
an intermediary within the UK, when VAT
would be charged. The phones would
then be exported again VAT-free, and the
exporter would claim back the VAT from
HMRC. The intermediary would disappear,
so HMRC would not have received the VAT.
The process would be repeated, and it was
as though the goods were going round
and round on a carousel. It is also known
as a ‘Missing Trader Intra-Community’ VAT
fraud. The same system can be used by
unscrupulous Carbon Credit traders.
28 September 2015 www.cicm.com
The recognised standard in credit management