If you run a business, you’re liable to pay VAT on your energy costs. However, depending on the type of business you own, you may be eligible for a reduced rate.
Here, we explain all you need to know about business energy VAT.
What is VAT?
VAT stands for Value Added Tax and is a government levy on goods and services. It is added to the price of nearly everything bought or sold, including financial services and utilities.
The standard UK VAT rate is currently 20%, but reduced rates can be as low as 5%.
Should my business be VAT-registered?
By law, you must register your business for VAT if its turnover is more than £85,000 a year. Businesses with an annual turnover of less than this can voluntarily register for VAT.
If you register for VAT, you will be sent a VAT registration certificate by HMRC which will confirm your VAT number, when to submit your first VAT return and payment, and your date of registration.
You will have to pay VAT on business energy regardless of whether your business is itself VAT-registered.
Does my business have to pay VAT on energy?
Most businesses are charged VAT at the standard rate of 20% on gas and electricity. This will automatically be added to you bill by your energy supplier.
Note that you won’t be able to claim the tax back (as you can with some other services), even though it is classed as a business-to-business purchase.
Could my business be exempt from paying VAT on energy?
No – all businesses must pay VAT on energy. However, depending on the type of business you own and the way you use your energy, you may be eligible for a 5% discounted rate.
How do I know if my business is eligible for lower energy VAT rates?
Your business may be eligible to pay a reduced rate of 5% on business energy VAT if:
- you are a charity or not-for-profit organisation
- you use at least 60% of your energy for domestic purposes – for example, if your business has a residential element such as a B&B, care home, student accommodation, caravan park or campsite. The 5% discount will apply to the whole bill so long as you use 60% or more energy for domestic purposes. If it is less than this, only the proportion of energy used for domestic reasons will be eligible
- your business uses an average of less than 33 kWh of electricity per day (1,000 kWh per month) and 145 kWh of gas per day (4,397 kWh per month). These are known as de minimis levels.
If you have a micro-business or run a business from home, you will qualify for the 5% rate providing you don’t use more than the de minimis levels.
How do I apply for discounted energy VAT rates?
If you think your business is eligible, you will need to submit a VAT declaration certificate which you can get from your energy supplier or usually find on your supplier’s website.
Unless your gas and electricity come from the same supplier, you will need to fill in a form for both your gas supplier and your electricity supplier.
The reduced rate should then be applied automatically, but it pays to check your bill to be sure. If it hasn’t been applied, contact your supplier as soon as possible.
Can claims for reduced business energy VAT be backdated?
If you believe you have been paying too much VAT on business gas and electricity, you can use your VAT declaration form to make a backdated claim for up to four years’ worth of payments.
What is the Climate Change Levy?
If you qualify for a reduced VAT rate on business energy, you may also be exempt from paying the Climate Change Levy (CCL).
The Climate Change Levy was introduced by the government in 2001 and is an environmental tax aimed at encouraging businesses to improve energy efficiency and reduce carbon emissions. As of 1 April 2020, this stood at a rate of 0.811p per kWh (kilowatt hour) for electricity and 0.406p per kWh for gas.
The CCL consists of two rates, which are as follows:
- main levy rate – if your business pays VAT at the standard 20% rate, it will also be charged the CCL.
- Carbon Price Support rate – you’ll pay this rate if you own electricity generating stations or you’re an operator of combined heat and power stations. However, it’s unlikely you will have to pay this if you generate your own energy and make money via the Feed-in Tariff as you’ll be classed as a small generator.
If you are eligible for a discounted energy VAT rate, you may qualify for exemption from the main rates of CCL.
If you are not exempt, you can sign a Climate Change Agreement (CCA) which may give you a discount of up to 90%. In return, you will need to make improvements to your business’ energy efficiency and reduce your average energy consumption.
What if my business circumstances change?
If your circumstances change and your business is no longer eligible for a reduced VAT rate, you will need to complete and submit a new VAT declaration certificate to let your energy supplier know.
You will also need to do this if you move premises or change energy supplier.
