Business Energy Bills and VAT

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Understand VAT on business energy: Learn how your business can benefit from reduced rates and navigate the complexities of VAT eligibility.

Business Energy Bills and VAT

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Over the last two or three years, we’ve all witnessed just how much energy prices can increase. Even with government attempts to put a lid on them through the energy price caps, many of us are still paying double what we were just a few years ago. 

And with these increased costs comes increased tax. VAT is charged on gas and electricity, but although paying for commercial energy is a business-to-business transaction, you can’t claim the VAT back in the same way that you would with other business expenses. 

But what if there was a way in which you could reduce the amount of VAT that you have to pay? Well, it is possible. Some businesses may be eligible for a significant reduction in the amount of VAT that they have to pay, but this isn’t an automatic process. 

VAT on Business Electricity

Value Added Tax (VAT) is a government charge levied on almost all goods and services. If your taxable business turnover is more than £85,000 per year, you’re legally required to register for VAT, but businesses with an annual turnover of less than this can voluntarily register for VAT as well. It’s payable on energy use for business purposes, and this amount will be automatically added to your bill before it’s sent to you by the supplier. 

How Much is VAT on Business Electricity?

VAT for business use is charged at 20%, but some businesses can qualify to pay a lower rate of 5%, whether this applies to you depends on how much energy you use, what industry your business operates in, and what's done on the premises.

How to Find Out Your Business Energy VAT Rates

The easiest way to find out which VAT energy rate you’re currently paying is to check the latest bill received from your supplier. This should include a full breakdown of how the payable amount has been calculated. 

What is the Business Energy VAT Threshold?

Eligibility for a reduction in the amount of VAT payable on energy bills is dependent on energy usage and what your business does rather than its size. You should be eligible for a reduced rate of 5% VAT on your gas and electricity bills if your average daily usage is no more than 145kWh of gas per day (4,397kWh per month) and 33kWh (1000 kWh per month) of business electricity. This threshold is known as ‘De Minimis' use. 

Eligibility for Lower VAT Rates

There are three main criteria for eligibility to pay a lower VAT rate on energy bills: 

  1. The meter is for domestic use.

  2. The meter supplies a charitable organisation that carries out non-business activities.

  3. There is low de minimis use on the meter.

As well as ‘De Minimis’ use, charities and non-profits can also qualify if they meet one of these two criteria: 

  1. At least 60% of energy used is for residential accommodation.

  2. At least 60% of energy used is for charitable non-business activities.

If your premises are mixed-use, you pay the 5% rate on the proportion of your business that’s used for dwelling or residential accommodation. You then pay the full 20% VAT rate on the proportion of energy which doesn’t qualify. Charities and non-profits are also exempt from the Climate Change Levy, which could reduce your energy bills by up to a further 20%.

How Eligible Businesses Can Apply for Reduced VAT on Energy Bills

If your business is eligible for reduced VAT on energy bills, you'll need to apply for it by filling in a VAT declaration form. You'll be able to get this form by contacting your energy supplier. If you have different suppliers for gas and electricity, you'll need to fill out a form for each. This discount isn't automatically applied, so your supplier will charge you 20% VAT on energy until you tell them you're eligible for a reduction.

How Charities and Non-Profits Can Apply for Reduced VAT on Energy Bills

You’ll need to fill out a VAT declaration form to apply as a business would, but you'll also need to give your supplier evidence that you're a charity. This can either be done by using your Charity Commission registration number or a letter of recognition from HM Revenue and Customs (HMRC).  

Do Business Energy Quotes Include VAT?

No. Business energy quotes don’t usually include VAT because energy companies already know that different businesses will end up paying different rates of VAT for their energy use in the first place. 

Can Your Business Claim VAT Back on Energy Bills?

If you believe that you’ve been paying more VAT on business gas and electricity than you should have been, then you can make a backdated claim for up to four years’ payments. If you do get a refund, it will be for the difference between the discounted and standard rates of VAT for the period that you’re claiming.

As with anything related to tax, making sure that you're paying the right amount of VAT on your gas and electricity requires a bit of work. But as we’ve seen, it is a worthwhile exercise to check whether you’re paying too much or not. Remember, if you’ve just changed suppliers, moved to new premises, or if your business is relatively new, it’s entirely possible that your energy supplier will not be aware that you qualify for any reduction, while the matter will not come up if you’re getting quotes. Make sure you get it checked. The financial benefits of doing so could make it extremely worthwhile indeed. 

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