What you need to know and how it may impact your business
Climate Change Levy (CCL)
In response to the climate emergency, the UK Government introduced measures to support businesses to operate with a reduced impact on the environment. This included a range of relief schemes and environmental taxes to tackle global warming.
What the Climate Change Levy is for?
The Climate Change Levy (CCL) encourages businesses to run in an environmentally-friendly way.
An environmental tax that charges based on the amount of energy a business uses, the CCL urges UK businesses to improve their energy efficiency and make operational changes to reduce their carbon footprint.
The history and aims of the CCL
Launched under the Finance Act 2000 as part of the UK’s Climate Change Programme, the Climate Change Levy came into action on 1 April 2001.
Intended to increase the energy efficiency of UK businesses, and for energy used for non-domestic purposes in general, the CCL aims to reduce carbon emissions. When it was formed, the Climate Change Levy was forecast to reduce emissions by 2.5 million tonnes per year by 2010.
The 2020 budget noted that the Climate Change Levy’s gas supply charges will increase in 2022/23 and 2023/24.
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Who the CCL applies to
An energy tax that applies to non-domestic consumers, along with value-added tax (VAT), the Climate Change Levy applies to businesses in:
- the industrial sector,
- the commercial sector,
- the agricultural sector, and
- the public services sector.
Some organisations will qualify for a CCL exemption, meaning they won’t need to pay the main rate of CCL for some supplies. You will qualify if one of the following criteria applies:
- you are a domestic energy user,
- your business uses a small amount of energy, or
- your organisation is a charity that runs non-commercial activities.
How the Climate Change Levy is charged
The energy company that supplies your gas or electricity is responsible for charging your business the appropriate rate for CCL.
As the energy firm is supplying the taxable commodity, it is their role as a supplier to collect the CCL charge and transfer it to the UK Government via HM Revenue & Customs (HMRC).
Some business customers might find that the CCL rate and charge are displayed as separate items on their energy bills.
What the Climate Change Levy costs
The Climate Change Levy relates to the units of energy your business has used per kilowatt-hour (kWh). When you look at your business gas or electricity bill, you’ll see that the CCL applies only to the unit rate and does not apply to your standard charges.
This means you are being taxed on the amount of energy your business uses, but not for the service charge you are paying to the energy firm to supply your energy and keep you connected.
The CCL has separate rates for electricity and gas. Back in 2001 when the CCL was set up, the levy was frozen at:
- 0.43p per kWh for electricity,
- 0.15p per kWh for gas, and
- 0.15p per kWh for coal.
Five years later, the UK Government announced it would start rising the Climate Change Levy in line with inflation rates and the tax is now much higher.
The rates from 1 April 2020 are:
- 0.811p per kWh for electricity,
- 0.406p per kWh for gas,
- 2.175p per kg for petrol, and
- 3.174p per kg for any other taxable commodity.
Reducing business energy costs
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Main rates for CCL
You’ll find the main rates for the Climate Change Levy listed on your business energy bills. Businesses that run in the industrial, commercial, agricultural and public service sectors are charged the main rates for energy usage of gas, electricity including electricity from nuclear, and solid fuel including coal, coke, lignite and petroleum coke.
Carbon Price Support rates for CCL
Paying reduced rates for CCL through CCAs
Some businesses can pay a reduced version of the main rate of CCL charges. Your business could be eligible if it is energy-intensive.
To pay a reduced rate for the Climate Change Levy, your business must enter into voluntary agreement to reduce its energy use and CO2 emissions with the Environment Agency. This is called a Climate Change Agreement (CCA).
These formal agreements set out incentivised, structured routes for improving energy efficiency. Challenging targets are set and there are financial penalties if these are not met. Businesses must complete audits and provide evidence to demonstrate they are complying with the agreement.
Once you enter into this agreement, your business will be bound by the CCA and can receive:
- 92% reduction in the CCL rate paid for business electricity, and
- 81% reduction in the CCL rate paid for business gas.
From 1 April 2020, the percentage you will be charged for the Climate Change Levy if you have a Climate Change Agreement are:
- 8% for electricity,
- 19% for gas,
- 23% for petrol, and
- 19% for any other taxable commodity.
Businesses entitled to reduced rates should submit a PP11 Supplier Certificate, downloaded from the HMRC website, detailing the percentage of CCL relief that is required.
How your business energy supply is affected by CCL
Business and non-domestic energy use
Energy supplies that are used solely for business purposes are charged:
- VAT at the standard rate, and
- VAT on CCL.
Business with low energy use
Low energy supplies used solely for business purposes may qualify for a reduced rate of VAT and be excluded from the CCL. If you qualify, you should check your supplier has applied all exclusions and reductions to your bill.
Domestic and non-commercial charitable energy use
Energy supplies used for domestic or charitable non-business purposes will qualify for a reduced VAT rate be excluded from paying the CCL. If the energy supply is only partly used for these purposes, only that part qualifies for the exclusions. Charities should check their status is recognised by HMRC.
Mixed business and domestic energy use
Organisations that mix activities between business purposes with domestic and charitable non-business purposes may qualify for some exemptions. You will be asked to make estimates about your energy usage to provide clarity on how much power is used for the activities that meet criteria for exemption. If 60% or more of your energy usage meets these criteria then your business may be excluded from CCL charges and eligible for reduced VAT.
Other exemptions from the CCL
Exemptions from the main rates of the Climate Change Levy will usually apply to electricity, gas and solid fuel supplies if the fuels:
- were generated from renewable sources,
- will be used to produce electricity in a generating station with 2MW capacity or more,
- are linked to combined heat and power (CHP) schemes registered under the CHPQA programme,
- will be used in specific forms of transport,
- will not be used in the UK,
- will not be used as fuel.
Latest updates to the Climate Change Levy (CCL)
- Through the 2020 budget, the Chancellor of the Exchequer announced that gas and other CCL charges will increase in 2022/23 and 2023/24. However, other rates are expected to remain the same. These changes are intended to rebalance the electricity to gas ratio.
- There will also be a change to reduced CCL rates in 2022/23 and 2023/24.
- Businesses will have experienced a substantial rise in CCL rates on 1 April 2019. The financial discount for businesses with a CCA also increased from that date.
The positive impact of action against climate change
2019 saw the UK’s greenhouse gas emissions fall for the seventh year in a row and it was a record year for clean energy, with more than a third (36.9%) of electricity was generated by renewables. The energy sources included:
- wind farms,
- solar panels, and
- biomass-fuelled power plants.
Kwasi Kwarteng, the energy minister, called this “extraordinary progress” for tackling climate change and expected this progress to built on during the months and years ahead.