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:
1. 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.
2. 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 reduced rate for domestic use.
3. 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 reduced electricity VAT rates.
Small businesses pay, on average, between £2,367 – £3,660 every year for their electricity. If they pay VAT at 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 the 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 onto 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 if they meet qualifying criteria, such as:
1. Your organisation holds charitable status
Charities do not have to pay the standard rate of VAT on their gas bills. If they can provide their energy suppliers with evidence that they are a charity and a written declaration or certificate to show that they meet the criteria for a VAT reduction, they should be entitled to pay VAT at 5%, rather than the usual 20%.
2. 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% on the gas used for business purposes and 5% for gas used for domestic purposes.
3. 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 supplier.
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.
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 charity, 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.
2. 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.
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. 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 fuel and power bills. Get a business energy quote now to start saving money.