Climate Change Levy and the 5% VAT rule: are you overpaying?

If your business uses no more than 1,000 kWh of electricity or 4,397 kWh of gas a month, that supply should normally carry reduced-rate VAT, not 20%, and no Climate Change Levy (CCL). Many small businesses pay both without checking.

Premises used mainly as homes, or by a charity for non-business activities, can also qualify. This guide explains the limits, the rules for mixed use, and a temporary change to VAT on electricity from 1 October 2026. Figures are as of 25 September 2026.

What is the Climate Change Levy?

CCL is an environmental tax on energy used by businesses in the industrial, commercial, agricultural and public sectors. Your supplier adds it to your bill. Households do not pay it.

From 1 April 2026, the main rates are:

The 2025–26 rate for electricity and gas was 0.775p per kWh.

As an illustration, a business using 20,000 kWh of electricity a year would pay about £160 a year in CCL at 0.801p per kWh, before VAT. That is not a huge sum, but it is money you should not be paying if you are exempt.

Who does not have to pay CCL?

According to HMRC's Excise Notice CCL1/3, a supply is excluded from the main rates if it is for domestic use, or for use by a charity in its non-business activities. That includes supplies below these small-use limits:

• Electricity: 1,000 kWh per month
• Piped gas: 4,397 kWh per month

HMRC says no certificate is needed for supplies within these limits. Your supplier should apply the exclusion.

Other reliefs exist, including for some combined heat and power schemes and for energy-intensive businesses in the Climate Change Agreement (CCA) scheme. GOV.UK lists the CCA reduced rate for electricity as a 92% discount on the main rate.

When should a business pay 5% VAT instead of 20%?

Business energy is normally charged at 20% VAT. VAT Notice 701/19 says the reduced 5% rate applies to "qualifying use". Supplies below these limits count as qualifying:

• Electricity: "not more than an average rate of 33 kilowatt hours per day, 1,000 kilowatt hours per month"
• Gas: "not more than an average rate of 5 therms or 145 kilowatt hours per day, 150 therms or 4,397 kilowatt hours per month"

HMRC treats these small supplies as "deemed to be for domestic use". The limits apply whether your bill uses an actual meter reading or an estimate.

Over a year, 1,000 kWh a month is 12,000 kWh of electricity. 4,397 kWh a month is roughly 52,800 kWh of gas. Many small shops, offices, salons and cafés are close to these levels, so it is worth checking your own figures.

Qualifying use also covers residential premises and charity non-business use. Notice 701/19 lists examples including care homes, children's homes, hospices, houseboats, caravans, and self-catering holiday accommodation.

What is the 60% rule for mixed-use premises?

Some premises are partly a home and partly a business, such as a shop with a flat above on one meter.

For VAT, Notice 701/19 says: "If 60% or more of the fuel or power is for qualifying use, you should treat the whole supply as for qualifying use and charge tax at the reduced rate." Below 60%, the supply is split between the reduced and standard rates.

CCL1/3 applies the same 60% threshold for CCL. If domestic or charity use is at least 60%, the whole supply is excluded from the main rate. Below 60%, CCL applies only to the part that does not qualify.

For mixed use above the small-use limits, your supplier needs a certificate from you. It must state the percentage of qualifying use for each premises, and be signed by a responsible person with their name and position. You must tell the supplier if your use changes.

What changes for electricity VAT from 1 October 2026?

From 1 October 2026 to 31 March 2027, qualifying electricity supplies in Great Britain are charged at 0% VAT instead of 5%.

This matters to businesses because qualifying supplies include those below the small-use limit. The government's announcement says the zero rate covers small businesses, charities and residential care homes already on the reduced 5% rate.

Key points, as of 25 September 2026:

• Electricity only. Gas stays at 5% for qualifying use.
• Great Britain only. In Northern Ireland, qualifying electricity stays at 5%.
• Business use above the limits is not affected. It stays at 20%.
• Bills that span 1 October. HMRC says suppliers may base the VAT on the date the energy was used, and recommends meter readings.

If you normally get 5% VAT on electricity, your bills from October should show 0%. If they still show 5% or 20%, ask your supplier why.

How can you check your own bill?

Look at one recent bill for each meter and check:

1. Your monthly usage. Divide the kWh on the bill by the number of months it covers. Compare it with 1,000 kWh (electricity) or 4,397 kWh (gas).
2. The VAT rate. It should be shown on each bill.
3. Whether CCL is charged. It usually appears as its own line.
4. Who uses the energy. If part of the premises is a home, or you are a charity, estimate the share of qualifying use.

If your usage is under the limits and you are paying 20% VAT or CCL, ask your supplier to review it in writing. Ask whether it can correct past bills.

For CCL, HMRC says customers can submit retrospective forms (PP10 and PP11) to claim relief they missed, for up to four years. Keep copies of bills and any certificates you send.

Our guide to reading a business energy bill shows where these lines usually appear. The business energy bill explained page covers each charge in more detail.

Does any of this matter if you're VAT-registered?

It depends on whether you can recover the VAT on your energy. If you are not VAT-registered, the VAT rate and CCL are both straight costs to you. If you are VAT-registered, ask your accountant how VAT on energy works for your business. CCL is a separate tax, not VAT, so it is worth checking either way.

This is general information, not legal, tax or financial advice.

What to do next

• Find your average monthly kWh for electricity and gas from recent bills.
• Compare it with the 1,000 kWh (electricity) and 4,397 kWh (gas) monthly limits.
• Check the VAT rate and any CCL line on each bill.
• If part of your premises is residential or used for charity non-business activity, work out the share and ask your supplier about a certificate.
• From October 2026, check that qualifying electricity shows 0% VAT.
• Ask your supplier in writing to correct any wrong VAT or CCL, and keep copies.
• Use the business energy estimator to see what a realistic annual bill looks like for your usage.

Sources

• Climate Change Levy rates — GOV.UK
• Environmental taxes, reliefs and schemes for businesses: Climate Change Levy — GOV.UK
• Excise Notice CCL1/3: Climate Change Levy reliefs and special treatments — GOV.UK
• VAT on fuel and power (VAT Notice 701/19) — GOV.UK
• VFUP2310: supplies deemed to be for domestic use — HMRC internal manual
• Temporary zero rate of VAT for domestic electricity in Great Britain (Revenue and Customs Brief 10, 2026) — GOV.UK
• Breathing space on your energy bill — GOV.UK