Calculating your carbon tax
With a 51% increase in the Climate Change Levy occurring on 1st April, Sebastian Gray explains one method to calculate your CCL tax liability accurately.
It is April 2019 and one of the UK’s biggest energy taxes, Climate Change Levy (CCL), has just increased by around 51% compared to last year. CCL on gas will increase again by 3.9% for 2020/2021, and a further 3% in 2021/2022 (see Table 1). However, it is worth noting that electricity CCL rates will slowly decrease to fall in line with the rate for gas.
To date, there has been little discussion on this tax; how it works, what it will cost or even if and how the cost can be mitigated. With the increase already in effect and CCL affecting much of the UK non-domestic energy market, now is the time to not simply discuss these questions, but to get ahead and manage this cost.
How it works
CCL is applied to electricity, gas, liquid petroleum gas (LPG) and solid fuels. However, exemptions for supplies from certain renewable sources and Combined Heat and Power (CHP) may be applicable.
CCL appears on non-domestic electricity and gas bills as Climate Change Levy; it is applied at the time of supply and is charged on the energy used.
CCL is calculated based on the amount of energy being supplied and is charged by the supplier of the taxable commodity. Suppliers then pay the collected tax to HM Revenue and Customs.
CCL is often shown as a separate line item on energy bills (usually above the VAT line) and is VAT applicable. It is charged at a flat rate on every kilowatt-hour (kWh) of energy used.
To help understand this cost, we have taken seven of the UK’s key sectors in Table 2 and applied the rates for 2018/2019 vs. 2019/2020 based on actual energy consumption from these sectors - you can see how this increase affects their energy costs below:
|Total CCL Payable (2018/2019)
|Total CCL Payable (2019/2020)
There are several exemption and relief schemes for CCL. The most common are climate change agreements (CCAs) and on-site self-generation. Self-generation exemption can be achieved through the installation of a CHP unit and registering it successfully with the government’s Combined Heat and Power Quality Assurance (CHPQA) programme.
The CHPQA programme was introduced at the same time as the CCL in 2001 and, like most government programmes, it has since developed tighter rules to ensure the programme works to its best abilities.
The CHPQA programme is a government initiative that aims to provide a methodology for assessing all types and sizes of combined heat and power (CHP) schemes throughout the UK. Participation in the scheme is voluntary. However, successful CHPQA certification grants eligibility to a range of benefits including Renewable Obligation Certificates, Renewable Heat Incentive, Enhanced Capital Allowances and preferential business rates. Those operating CHP units could (and still can) obtain an exemption from CCL on the gas used by the CHP scheme by registering with the CHPQA programme.
However, HMRC mandated the requirement that annual reconciliation should be carried out. This entails determining the CCL paid in the previous year and retrospectively applying actual exemption based upon an issued CHPQA certificate.
A climate change agreement (CCA) is a voluntary contractual agreement between a business and the Environment Agency (EA). The organisation agrees to report energy to the EA against a target. In return, operators who hold a CCA will have their climate change levy reduced by 90% on electricity bills and 65% on other fuels.
CCAs are a UK Government initiative with the objective of reducing industrial energy use and CO2 emissions. They cover a range of energy-intensive processes such as chemicals, paper, supermarkets and intensive agriculture such as poultry farming. The first CCA reporting period was in 2002. In its current form, CCAs are to continue operating until 31st March 2023.
Legislation within the Finance Act 2000 made provision for a reduced rate of the levy for energy-intensive industries that have entered into a negotiated energy efficiency Climate Change Agreement (CCA).
If neither of these are viable options for your organisation, it is recommended that you undertake energy audits of your sites to help identify energy saving measures that can reduce your energy use and in turn reduce your CCL liability.
Energy is taking a more prominent position within an organisation’s running costs and CCL is a tax that is set to stay for the foreseeable future. Neither of these facts can be ignored by users of energy, energy consultants or industry media any longer.
It is crucial that more organisations are made aware of these costs and how to go about reducing them - as well as how they can reduce their energy consumption and impact on the environment.
Businesses with CCAs or those operating CHP units can reduce liability further. For organisations starting on the road to reduce their CCL liability, if CCAs are not a viable route, then the installation of a CHP unit should be considered as soon as possible. Further to this, energy audits to reduce energy use and costs need also be considered.
Sebastian Gray is a director of 2EA energy assessors
Front image credit : Shutterstock Enciktepstudio