Guide to VAT and Climate Change Levy (CCL)

Business gas and electricity are subject to taxes. If you own a business, most likely two types of tax on energy will apply to you. That includes the Value Added Tax (VAT) and Climate Change Levy (CCL). Understanding what they are applied to, what their rates are, and who can be exempt from paying them is very important for businesses. Knowing how these two taxes work can help your business save money and manage your energy consumption more efficiently. Taxes on energy can be complicated, but Niccolo Marketing wants to help customers understand what they are. That’s why this guide provides all the important information about VAT and CCL. It lets you verify whether your business is eligible for reduced tax rates, and if so, how you can apply for them.

VAT on electricity and gas explained

VAT represents a tax on services and goods. It is also applied to the consumption of utilities including electricity and gas. All businesses that have an annual turnover of more than £85,000 are legally required to register for VAT.

In the UK the standard rate of VAT is 20% but it is possible for your business to get a lower rate subject to certain conditions. All businesses and charities registered in the UK need to pay VAT on their energy use. The current legislation distinguishes two rates of VAT on the use of electricity and gas for non-domestic purposes:

•  the standard rate – 20% that will need to be paid by most businesses.

•  the reduced rate – 5% that some businesses can qualify for.

Reduced VAT on electricity and gas

What businesses can get reduced VAT?

You can get the reduced rate if your energy is used for domestic or charitable purposes. Such activities are described as ‘qualifying use’ and include, for example, supplying care homes for disabled and elderly, student accommodation, and children’s homes, or providing non-business services like free daycare for people with disabilities. That’s why most charitable and non-profit organisations are eligible for the 5% VAT.

Other examples of non-business activities that can qualify your business for rate reduction are:

• receiving money in the form of voluntary donations

• getting grants

• providing services for free

If you take money for the services your organisation offers you will be classed as business use and you will have to pay the standard rate of 20%, even if the profit you make goes to charity.

To qualify for VAT rate reduction an organisation has to prove that it’s registered with the Charity Commission for England and Wales, or that is has been recognised as a charity by HM Revenue & Customs (HMRC) for tax purposes. 

Other ways to get VAT reduction

Business users can also get a reduced VAT rate if the supply of electricity and gas to the site does not exceed certain usage rates. If during a billing period, on average, you use less than 1000kWh per month of business electricity and less than 4,390 kWh of business gas, you will qualify for the reduced rate of 5% VAT. If that’s the case you should get the lower VAT rate automatically, without the need to officially certify it.

What about businesses that perform business and non-business activities?

If you use 60% or more for non-business activities, you will get the reduced VAT on all supplies. Otherwise, you can get the reduced rate on the part that is spent on non-business use and the standard rate on the energy used for business purposes.

You will need a certificate outlining how much gas and electricity are used for non-business and business activities respectively.

CCL on electricity and gas explained

CCL is an environmental tax imposed by the government on business customers, rather than domestic ones. The purpose of the tax is to lower gas emissions and encourage better energy efficiency. The background behind it is that in 1997 at the Kyoto Summit on Climate Change, the member states of the European Union committed to reducing Greenhouse Gas Emissions by 20% by 2020.

How much each business will have to pay differs as CCL is determined based on how much energy your site consumes each month. CCL is applied only to units of certain commodities used, not other parts of the energy bill. The units are expressed in kWh.

Climate Change Levy includes two rates:

• The main levy rate – if your business pays the standard VAT rate, it will also have to pay the CCL

• The Carbon Price Support rate – paid by those who own energy generating stations.

CCL main rates

The table below displays the most recent CCL rates:

The rates are adjusted each financial year and they tend to increase every April. They do not apply to taxable supplies used by domestic consumers and charities.

Exemptions from CCL

Who can get CCL exemption?

If your business pays the standard VAT rate, you have the legal responsibility to pay CCL as well. If you qualify for the reduced VAT rate, you are automatically exempt from the obligation to pay CCL.

Supplies that are not subject to CCL include:

1. Energy for domestic use

2. Charities that offer free, non-business services

3. Oils as there are other taxes imposed on them

Supplies that can be exempt from paying CCL include:

1. Fuels that are supplied to certain forms of transport

2. Electricity from renewable sources

3. Supplies that go to electricity producers

Some industries that are a part of the Climate Change Levy Agreement (CCA) can get 90% CCL reduction if they meet certain energy efficiency targets. For gas they can get 65% reduction.

What is domestic use?

VAT and CCL concern only business energy users. Supplies that are considered to be domestic use qualify for reduced VAT rate and are automatically exempt from CCL. Domestic use refers to activities in:

• residential premises like houses, flats, caravans, houseboats, monasteries
• residential homes like premises providing accommodation for elderly, disabled, children
• rehabs and mental health facilities
• hospice and palliative care
• holiday accommodation including self-catering caravan parks
• schools and student accommodation

How to apply for VAT reduced rate and CCL exemption?

To start your application, you will need to get a VAT Declaration Form. If your business has been paying the standard VAT rate even though it is eligible for the 5% reduced rate, when you fill the form you can claim up to 4 years of overpayments back. To get the form you will need to contact your energy provider and ask them to give it to you.

If your organisation has qualifying use and you want to get VAT reduced rate, you need to also submit a Customer Declaration Certificate for each supply. In the document, you have to report what percentages of your energy supplies are used for domestic and non-domestic purposes.

In order to be able to change the VAT rate, you need to prove that you use the energy supplies for non-business purposes. You can do it by providing your energy supplier with one of the two:
• either your registered charity numbered granted by the Charity Commission
• or evidence that HMRC has recognised you as a charity for tax purposes

If the outcome of the application confirms that your organisation can get VAT reduction, you’ll automatically be exempt from paying certain other government taxes too. For example, being able to claim reduced VAT on electricity and gas means you become exempt from the Climate Change Levy.

If you are eligible for other reliefs and full CCL rates do not apply to you, you have to fill in a PP11 Supplier Certificate for all supplies separately. You can find the form here.

If you are not eligible for a full exemption but you don’t want to pay the CCL you can sign a Climate Change Agreement (CCA). That would allow you to get a discount on the tax. If you decide to do it, however, you have to commit to reducing your business’s energy consumption.