5 myths about levy exemption, busted
Here we aim to explain the facts about environmental levy exemption by busting the most common myths.
The UK Government is committed to achieving net-zero carbon emissions by 2050 but it is also keen on keeping the cost of energy low to allow businesses to remain competitive.
Over the years there has been a significant increase to the cost of environmental taxes and other third-party charges. We have witnessed rising electricity costs from around 30% of the overall bill ten years ago to around 65%. This means it is ever more important to understand them and how they can be mitigated.
Environmental charges currently account for around 36% of your electricity bill and 10% of your gas bill. Several environmental schemes have been introduced including Climate Change Levy (CCL), Contracts for Difference (CfD), Renewable Obligation (RO) and the Feed-in-tariff (FiT) to incentivise businesses to invest in renewable generation and efficient technologies.
The costs associated with funding these schemes are recovered through environmental levies. However, the Government recognised these charges could impact the competitiveness for more energy intensive industries (EIIs) – providing exemption relief from some or all of these costs.
Given the complexities of each environmental scheme and associated levy discounts, there is much room for confusion and differing interpretations. Here we aim to explain the facts about environmental levy exemption by busting the most common myths:
- You can only be eligible for one exemption
This is incorrect, you may qualify for more than one type of exemption. There are currently three types of exemption schemes running, each with its own qualifying criteria.
Since the beginning of April 2014 any energy used by a company for mineralogical or metallurgical purposes is exempt from the main rates of CCL. This is to ensure that the tax treatment of UK based EIIs is in line with the tax treatments of European EIIs, thus reducing any distortion of competition.
This scheme enables businesses to enter into a voluntary agreement with the Environment Agency (EA) to reduce their energy use and Co2 emissions, in return for a discount on their CCL. This scheme closed to new applications earlier in November 2020, but those businesses already in a CCA may now benefit from expert help as they can be incredibly tricky to manage and aren’t always set up correctly.
The government also provides support to UK based energy intensive businesses, in order to enable them to compete with businesses from other countries with lower energy costs. EII businesses can currently claim an exemption of up to 85% of their Contracts for Difference (CfD), Renewables Obligation (RO) and Feed-in-Tariff (FiT) costs.
- Eligibility is based on emissions targets and energy contracts
If your business performs an energy intensive process, you could be eligible to apply for exemption from some of these taxes. Your eligibility has nothing to do with the type of energy contract you are on or how you are reducing your emissions.
For CCA & MinMet, this eligibility is based on the type of manufacturing processes you undertake on site.
For the EII exemption, businesses must manufacture a product in the UK within an eligible sector – the ‘sector level test’ and must also pass a 20% electricity intensity test – the ‘business level test’, to focus the exemption on those who are most impacted by rising energy costs.
- You can claim up to 20% of your electricity and gas from previous 4 years
Claims are dependent on the nature of your business and the assessment of your on-site manufacturing processes. You may not be completely eligible for a 4 year back date or able to claim the full discount so you should look at working with an experienced, independent consultant to complete a full assessment of all eligible processes and work out the amount of relief you are entitled to.
These schemes are run through HMRC, who must be notified of your participation and require annual assessments. It’s important to note, if a business mis claims, they would be committing tax fraud. The business would have to pay all money back plus interest and run the risk of a wider HMRC audit.
Don’t get caught out! If you are already in receipt of an exemption, your business must maintain detailed evidence of your entitlement to exemption(s) throughout the period of the claim. Failure to do so, may result in penalties for non-compliance and risk of over and under claims.
- You will receive a lower unit rate by applying for exemption
Not necessarily. Unit rates apply to the cost of wholesale energy (commodity element), not the third-party charges (non-commodity element) on the bill. Unless you are on a fully fixed contract, you would not receive a lower unit rate by applying for an exemption.
As the aim of a CCA is to reduce energy use and CO2 emissions, your business would have to improve its energy efficiency and lower its average energy consumption, which would ultimately result in reducing your bills overall, but not your unit rate. With a CCA, you will only receive your CCL discount if your business has met its targets at the end of each term. Those who don’t meet their efficiency targets would have to pay a buy-out fee, to continue receiving their CCL discount.
- CCL costs have increased by 60-70% in the last year
Inspired has recently been made aware of some energy brokers contacting organisations, using scaremongering tactics and strongly implying CCL increases of a fictitious amount in order to gain access to a business’s contracts and bills.
Electricity CCL costs actually decreased by 5% from April 2020 to April 2021. In the same time period, Gas CCL costs did increase by 13%, but this is nowhere near the 60-70% some suppliers are quoting.
The Government announced in its 2020 budget that CCL rates for gas will increase year on year to 2025, while the electricity rate will be frozen from April 2022.
Brokers who are advising you to provide them with copies of your invoices are unlikely to be able to use this information to help you understand your options. A full assessment of on-site processes would be undertaken. It is important that you don’t sign a Letter of Authority (LOA) without fully understanding a broker’s terms and conditions, as this can then give them full access to act on your behalf. If you are contacted by these brokers and want to pass them our details, we would be happy to discuss directly with them.
How can we help?
Levy exemption schemes not only help to protect your business from rising levy charges but you can reclaim exemption to recover revenue, helping your business remain competitive. If you’re thinking about applying for exemption, work with a partner who truly understands the process and implications for each scheme as there could be big consequences if you get it wrong.
Our Levy Exemption service has been designed to provide your business with assurance that you are maximising your full benefit. Eligible businesses could save up to £41K per GWh each year and you may even qualify for more than one type of exemption.
We understand the exemption compliance process and can advise you on the optimum approach and correct claim amount for your business. We can also ensure you have documented evidence of your entitlement for if you are audited. For more information, call 01772 689250, email your account manager or email [email protected].