United Kingdom - Green travellers face VAT shock

Businesses and consumers will have to pay VAT on offsetting their carbon emissions when Treasury plans to be published next month come into effect. The travel industry has responded with fury to this latest 'green' tax.

Companies like British Airways and Lastminute sell 'carbon credits' which allow holidaymakers to offset, or cancel out, the emissions from their flights by investing in green energy projects. These credits are currently exempt from VAT. But a new code to regulate the carbon offsetting industry, which will be introduced by the end of the year, will levy the top rate of VAT on each credit bought, raising the price by almost a fifth.

Companies such as BSkyB and hedge fund Man Group which have pledged to become 'carbon neutral' by offsetting all their emissions will also be hit.

Last week, officials from the Department for Food, Rural Affairs and the Environment (Defra) met companies to discuss the planned code. It is understood that Defra has sought an exemption. But the Treasury has blocked this move, citing European Union regulations which stipulate that any 'service' - now including offsetting - must pay the 17.5 per cent levy. Until now, most carbon credits have been treated as donations for tax purposes.

Experts estimate that last year companies and up to 500,000 individuals in the UK spent a total of about £8m offsetting their emissions.

Airlines already feel they are being hit by bogus 'green' taxes. Last December, Gordon Brown doubled air passenger duty, which he presented as an environmental tax even though it is not linked to the degree of pollution aircraft emit. The government bowed to pressure this month and will eventually replace the levy with a tax on flights.

A spokeswoman for travel association Abta said: 'Charging VAT could potentially turn consumers away from offsetting if the government is creaming off some of the proceeds. Our concern is that money which is supposed to help save the planet is going into government coffers. It has already been a very hard battle for some of our members to buy into the idea of offsetting because of the doubling of air passenger duty.'

A spokesman from the Treasury confirmed: 'We are not currently seeking an exemption from the EU though we would keep the situation under review.'

...#9632; Brendan Barber, general secretary of the TUC, has urged Chancellor Alistair Darling to resist growing calls to scrap controversial reform of the capital gains tax regime, writes Nick Mathiason. Instead he should crack down harder on private equity tycoons and tax avoidance while leaving employee share schemes unaffected and encouraging enterprise.

In a letter seen by The Observer, Barber warns the Chancellor that it is vital he should resist business pressure to abandon the changes, which would see a flat rate of 18 per cent instead of the current 10 per cent.

A growing business lobby believes that the move will discourage entrepreneurs and business angels from backing new start-ups.