What's The VAT On Business Energy?

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    What is VAT?

    Value-added tax (VAT) is a government charge levied on almost all goods and services.

    So what percentage is VAT in the UK? And what do you pay VAT on? The current UK VAT is set at 20%. However, some products and services are charged at a reduced rate of 5%, and some are completely exempt from VAT. Businesses may need to pay different rates of VAT than individual consumers on some products and services too.

    It’s clear then that, when it comes to this tax, it’s not a case of one size fits all. So, how do you know if, as a business, you’re liable to pay VAT on business energy? In this guide, we give you a rundown of how this important tax relates to your business’ energy bills.

    What does VAT apply to?

    If your company is VAT-registered, you typically add 20% VAT to your goods and services, paying this to HM Revenue and Customs (HMRC) every three months.

    VAT doesn’t apply to items exempt from VAT or those exempt from the UK VAT system.

    Business gas and electricity are VAT applicable. If your business or property is VAT registered, you can reclaim the VAT as input tax on your expenses, following standard VAT deduction rules.

    Keeping track of contract renewals is crucial to avoid overpaying. Our Digital Renewals service manages this hassle-free, ensuring you always get the best deal.

    Is there VAT on your business electricity bills?

    Yes, electricity is one of the many consumables that VAT is levied on. Energy suppliers must apply this tax on the electricity they supply to businesses, homeowners and other organisations. However, the electricity VAT rates are not the same for everyone, and some businesses may be eligible for a VAT reduction.

    If you want to know how much VAT you’re currently paying on your electricity, contact your supplier. You can also refer to a recent energy bill as the amount and rate of electricity you are paying should be clearly shown on this document. Although, strictly speaking, electricity is a business-to-business purchase, businesses cannot reclaim the VAT they pay on their electricity supply.

    How much is VAT on business electricity?

    Most businesses have to pay the standard 20% VAT rate on electricity bills. However, you may be entitled to pay the reduced rate of 5% if your business meets any of the below criteria:

    It is a charity

    If your organisation meets the legal definition of a charitable organisation, it may be eligible to pay VAT at 5% on electricity if it’s used for residential accommodation, charitable non-business activities or if you use less than 1,000 kWh of electricity per month. To get your electricity at a reduced rate, you must provide evidence that the organisation is a charity, such as your Charity Commission registration number, or a letter from HMRC that confirms that you’re entitled to VAT relief.

    You use your electricity for both domestic and business purposes

    If 60% or more of your electricity is for domestic use, for example, if it’s used in a children’s home or self-catering accommodation, the reduced rate of VAT should be applied to your whole electricity bill. If less than 60% is used for domestic reasons, the bill should be apportioned between the standard rate for business use and the reduced rate for domestic use.

    If you’re a low-energy user

    If, on average, you use less than 33 kWh of electricity per day or 1,000 kWh of electricity per month, you should qualify for a reduced rate of VAT.

    Small businesses pay, on average, between £2,367 – £3,660 every year for their electricity. If they pay the standard rate, they end up spending between £473.40 and £732 per annum in tax on electricity. In contrast to businesses, homeowners are automatically charged VAT at a lower rate of 5%. Homeowners in England and Wales spend £1,054 for electricity on average per year. About £50.19 of this goes towards VAT.

    Is there VAT on your business gas?

    Gas, like electricity, is subject to VAT. Your gas supplier will automatically add this charge to your bills. Whether you’re a business owner, a homeowner or the owner of another organisation – such as a school, a church or a charity – you will have to pay some level of VAT on gas.

    How much is VAT on business gas?

    The VAT rate on gas is set at 20% for businesses and 5% for domestic users. The average small business in the UK spends between £820 and £1,458 on gas annually. This means that these businesses can expect to pay between £164 and £291.60 in VAT on this fuel each year. Households in England and Wales on average pay £717 per annum on gas for their homes (based on a consumption of 15,000 kWh per year) with £34.14 of this total spend going on VAT.

    As is the case with electricity, businesses may be entitled to VAT relief on gas and heating, if they meet qualifying criteria, such as:

    Your organisation holds a charitable status

    A charitable organisation does not have to pay the standard rate of VAT on their gas bills. Suppose they can provide their energy company with evidence that they are a charity and a written declaration or certificate to show that they meet the criteria for a VAT reduction. In that case, they should be entitled to pay 5%, rather than the usual 20%.

    Your gas is used for both domestic and business purposes

    If you use gas for both business and domestic use, you may be entitled to some reduction in VAT. For the lower rate of 5% to be applied to your whole gas bill, at least 60% of your gas would need to be for domestic purposes. If the domestic consumption is less than this, you would have to pay 20% for the gas used for business purposes and 5% for gas used for domestic purposes.

    If your gas consumption is low

    If your business uses less than 145 kWh of gas a day, or 4,391 kWh per month, you will be regarded as having low usage. In this case, a VAT reduction should be automatically applied to your invoice. If you think you’re entitled to the lower rate but you’re not getting the discount, get in touch with your energy company.

    VAT for businesses vs. other groups

    As we’ve already mentioned, the rates of VAT on gas and electricity are different for businesses and domestic users. While the VAT on energy bills for businesses is set at 20%, as we’ve pointed out, some are entitled to a reduction. Homeowners, meanwhile, only need to pay 5%. But what about other organisations? Let’s take a look.

    Schools

    If a school is voluntary aided, voluntary controlled or a foundation school (but not a community school), it holds charitable status. As with any other charitable organisation, then, it is entitled to receive fuel and power at the lower rate of VAT. If energy is used for business activities, it must be apportioned between the higher and lower rates.

    Most private schools hold charitable status and are therefore entitled to a discounted rate of VAT on electricity and gas.

    Academies and free schools, meanwhile, are eligible for a reduced rate of 60% or more if their energy consumption is for non-business activities, or they are considered a low energy user.

    Places of worship

    If a place of worship consumes less than 33 kWh of electricity per day or 1,000 kWh of electricity per month, or less than 145 kWh of gas a day or 4,391 kWh per month, it will automatically qualify for the reduced gas and electricity VAT rates.

    Churches and other places of worship that are deemed to be charities in the eyes of the law are also eligible for VAT relief on energy bills. However, they must ensure that at least 60% of their energy usage is for non-business activities.

    How to find out the VAT rate on your business energy?

    To determine the VAT you’re paying, simply take a look at your most recent business energy bill. It should display the rate and the amount of VAT paid for that month.

    What is the business energy VAT threshold?

    If your daily gas consumption averages less than 145 kWh, you may qualify for a reduced 5% VAT rate on your gas and electricity bills.

    Can your business claim VAT back?

    VAT-registered businesses can typically reclaim VAT as input tax on their business expenses only, following standard VAT deduction rules, irrespective of the VAT rate charged.

    To check if and how much input tax your business can claim back, including VAT on energy costs, check the government website for VAT Notice 700, section 10.

    What is the Climate Change Levy?

    With the climate crisis at the forefront, the UK government has implemented environmental tax schemes to encourage businesses to operate sustainably. The Climate Change Levy and net zero carbon emissions scheme aim to reduce environmental impact. Check out our guide to find out more about the scheme which offers tips to cut carbon emissions and save on business expenses while benefiting the environment.

    Saving money on your energy bills

    If you think you might be entitled to a discount on the VAT you pay on your utility bills, get in touch with your energy supplier. If you’re not entitled to a reduction, it is still possible to save money on your bills by switching to another provider or implementing energy efficiency techniques.

    Whether you’re an SME, a large business or another organisation, you can count on Utility Bidder to find the best tariffs for you on your gas and electricity bills. Get a quote now to start saving money.

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    Please enter your business gas information
    How much do you spend & how often?

    An estimate is fine if you don't have a bill to hand

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    Let’s save time, can we automatically gather meter information?

    ? What does this mean?
    To get your quotes at lightening speed we need several key pieces of information which can all be found on your electricity bill. But by simply ticking this box, we can search ‘industry held data’ to get your meter number, electricity consumption and current energy supplier. This means that we can get you quick quotes without asking you to dig out all of your paperwork. This is personal data therefore we need you to allow us to access this information.
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    Do you know your electric meter number?

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