VAT for Business Electricity & Gas
We’ve all seen the term VAT on bills and receipts, but what does Value Added Tax actually mean for your business? How does it apply to energy and what is the rate of VAT on electricity and gas for businesses? Read on for all the answers and see if your organisation is eligible to pay a reduced rate of VAT on energy.
What is VAT?
Before we look at VAT on electricity and gas, let’s start with a brief explanation of what VAT actually is. VAT, or value-added tax, is a government levy that is applied to almost all goods and services that are bought or sold. This includes consumer items, financial assets, rentals and utilities.
Since January 2011, the standard UK VAT rate has been 20%, though some goods and services, such as domestic energy, are subject to a reduced rate of 5% VAT.
Does my business need to pay VAT?
Businesses with an annual turnover exceeding the current VAT threshold of £85,000 must register for VAT and file a VAT return. If your turnover is less than £85,000, you can also volunteer to pay VAT, should you wish.
Should my business pay VAT on business electricity and gas?
Both business and domestic energy usage is subject to VAT. Therefore, whether you're on business premises or working from home, you'll have to pay VAT on any electricity and gas you use for work.
Even though paying for commercial energy is a business-to-business transaction, you will not be able to claim back VAT on electricity and gas, as you would with other similar purchases.
What rate of VAT is charged on business electricity and gas?
Most businesses pay a rate of 20% VAT on electricity and gas, which is automatically added to your final bill by your business energy supplier. However, depending on the type of business you own and how you consume energy, you may be eligible for a discount.
Domestic energy is subject to VAT at 5%, and this is what you will be charged if you work from home. If you’re working remotely and use very little energy, you may be able to save money by using a business energy tariff with lower rates while still taking advantage of the 5% rate VAT on electricity and gas. You must be able to prove that at least 50% of your household's energy usage is for business purposes in order to switch to a business energy deal when running your business from home.
Who qualifies for reduced VAT on electricity and gas?
While you cannot claim back VAT paid on business energy, you may be eligible to pay a reduced 5% rate of VAT on your gas and electricity if your business meets certain requirements.
Which businesses are eligible for a VAT reduction on business energy?
Although they may charge for some of their services, charities and non-profit organisations are eligible for the reduced VAT rate of 5% on their business energy.
Businesses that are used as a dwelling or residential accommodation also qualify for the reduced business energy VAT rate. While this does not apply to hospitals, prisons, or other similar facilities, it does include the following:
- Businesses run from home which use at least 60% of their energy for domestic purposes
- Businesses with ‘low’ energy usage
- Children’s care homes
- Homes that provide care for the elderly or disabled, persons with a past or present dependence on alcohol or drugs, and those with a past or present mental disorder.
- Institutions where at least 90% of their residents live as their primary residence
- Monasteries, nunneries and similar religious communities
- Residential accommodation for school or university students
- Self-catering holiday accommodation
What counts as ‘low’ energy usage?
You are considered a business with low energy usage if:
- You use less than 33kWh of electricity per day (1,000kWh per month)
- You use less than 145kWh of gas per day (4,397kWh per month)
If your energy usage is low enough to meet these requirements, your supplier should apply the VAT discount to your bill automatically – but double-check with them just to be sure.
How do I apply for the discount VAT rate on business gas and electricity?
If you think your company might be eligible for a lower rate of VAT on business energy, you'll need to fill out a VAT declaration form, which you can request from your gas and electricity suppliers. This form is usually also available on the supplier’s website.
You can also use the form to request a refund for any overpayments made in the preceding four years. Additionally, you'll be exempt from paying certain government levies if your company qualifies for a VAT reduction, such as the Climate Change Levy (CCL).
If any of the following apply to your business, you will need to contact multiple suppliers and fill out declaration forms from each:
- You've changed energy suppliers in the last four years or during the period for which you're claiming
- You have different suppliers for gas and electricity
- Your business has multiple premises that qualify for the discount
Does the Climate Change Levy (CCL) affect my business energy VAT rate?
You may not have to pay the Climate Change Levy if you qualify for the reduced rate of VAT on electricity and gas. Businesses that don’t qualify for the CCL can instead sign up to the Climate Change Agreement (CCA), if they wish. With the CCA you will receive a tax break if you agree to make certain improvements to your company's energy efficiency. As a result, not only do you reduce your environmental impact by lowering emissions, but you also reduce your consumption and outgoings.
Do business energy quotes include VAT?
Most business energy quotes exclude VAT and CCL charges due to the fact that some businesses are VAT exempt or have different CCL rates.
If you'd like to calculate your rates with these costs taken into account, speak to one of our business energy experts on 020 3318 3633 or get a free business energy quote with VAT and CCL charges included.