I am indebted to Keith Hobson, a partner at iTax UK LLP, for pointing out that the UK did actually follow France in zero-rating carbon credits; however, you could still be liable retrospectively.

He says “Whilst the trading in these credits became zero rated as of 31 July 2009, leading to greatly diminished tax risks going forward, (http://www.hmrc.gov.uk/briefs/vat/brief4609.htm), there still remains the potential for risk in respect of trades prior to when zero rating came into force where a business may seek credit for VAT paid out on carbon credits. If HMRC have identified a VAT loss in the supply chain in respect of a pre-zero rating claim by a business, then recent EU case law ( Kittel, as currently interpreted by HMRC) gives them the right to deny a VAT reclaim or even assess for input tax already paid out, by alleging that the business “knew or should have known” of the fraud.”

For more information, or if you think you need you need advice, they have produced a useful brochure at http://www.itaxuk.com/iTax_Brochure_2009.pdf