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VAT on Energy Bills Explained

Not all businesses pay the same VAT rate on their business electricity and business gas bills. While 20% is the default rate, some qualifying businesses pay just 5% VAT on the business energy. This guide will explain who qualifies for this reduced level of VAT.

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VAT on Business Electricity and Business Gas

As a business operating in the UK, there are some savings you can make around VAT on business electricity. If a company meets certain criteria, they may be able to lower this rate to just 5% – in this guide, we will help you navigate the potential savings that could benefit your business when it comes to electricity VAT.

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What is VAT?

VAT (value-added tax) is levied on the cost of a good or service, including gas and electricity from an electricity supplier.

The standard rate of VAT increased to 20% on 4 January 2011 (from 17.5%).

Some items are exempt from VAT, such as postage stamps, and financial and property transactions. Some organisations are even exempt from paying full VAT and will pay a discounted rate, such as charitable institutions and businesses that have a turnover of less than £85,000 per year.

How much VAT does my business have to pay for electricity?

Companies will have to pay VAT on business electricity and commercial gas bills if their annual turnover is more than £85,000 per annum.

Businesses are required to register for VAT with HMRC, once you have done so they will send you a VAT registration certificate.

Unfortunately, even though business electricity is an essential service VAT is applicable and will be applied to your bills.

Calculating VAT on business electricity.

Can my business get discounted VAT?

Many businesses will pay a 20% VAT rate on business gas and business electricity bills.

You may be eligible for a 5% discounted rate if any of the following apply:

  • If your business gas usage is less than 4,397 kWh per month and business electricity usage is 1000 kWh per month;
  • Your business is a charity or non-profit;
  • 60% or more of the electricity used by your company is for domestic purposes.

What is the Climate Change Levy?

On top of VAT reductions, some businesses are also eligible for the Climate Change Levy (CCL). The CCL is an additional electricity tax and rates are set every year by the government in an effort to encourage businesses to become more conscious of their carbon footprint.

There are two rates in the CCL:

The primary levy rate – If your business pays a 20% VAT rate, then if you are in one of the CCL-targeted industries, you will pay the full CCL rate.

Carbon Price Support rate – This is only applicable if you run a large-scale electricity-generating complex.

You can find the latest rates on the Government website.

Other ways a business can reduce their VAT

Solar panels are a great way to minimise your electricity bills and make your business more sustainable and less reliant on fossil fuels.

Discounted rates of VAT apply for the installation of solar panels in residential accommodation, such as:

 

  • houses, blocks of flats or other dwellings
  • armed forces residential accommodation
  • children’s homes
  • homes providing care for the elderly, disabled people, or people who suffer or have suffered from drug or alcohol dependency or mental disorder
  • hospices
  • institutions that are the sole or primary residence of at least 90% of their residents
  • monasteries, nunneries and similar religious communities
  • residential accommodation for students or pupils
  • self-catering holiday accommodation
  • caravans used as a place of permanent habitation (such as a park home or static caravans sited in a permanent residential caravan park)
  • houseboats that are designed or adapted for permanent habitation and have no means of self-propulsion, or other boats which are used as a person’s sole or principal residence (such as canal boats and Dutch barges) on which the boat owner pays Council Tax or domestic rates.

VAT-registered organisations can claim the VAT on solar panels back on their quarterly returns, but for other businesses, 20% VAT for the cost of solar panels will apply.

Are you paying the correct business VAT?

You may not be paying the correct rate of VAT if you haven’t informed your electricity supplier that you are eligible for a discount. electricity providers apply the standard 20% rate to business electricity bills, meaning that if you are a charitable organisation, or are otherwise eligible, you may be able to apply for a rebate.

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