£100 Million Wrapped Up For Charities In Energy VAT Clause

A third of the UK's 180,000¹ Registered Charities are paying too much for their energy, unaware that they qualify for a reduced VAT rate of 5% and could be in line for rebates worth £100 million.

According to the business price comparison service - 'Make It Cheaper' - charities will have made a collective VAT overpayment of £22.6 million on their electricity bills alone in 2010, plus a further £8.5 million on Climate Change Levy (CCL) payments from which they are also exempt².

Charities that have been overpaying VAT and CCL can claim a rebate of up to three years see guide on VAT for charities. The Regal Community Theatre in Bathgate near Edinburgh, for example, recently received £11,000 after writing to its supplier to point out it had been paying the incorrect rates for gas and electricity. Gillian Robertson, financial administrator, commented: "Because it was reclaimed, that is cash in our pocket now of £7,000 for the electricity and just about £5,000 for the gas. With all the cuts that are about to happen, this goes a long way towards keeping our doors open to the public."

Under the Finance Acts 1993 & 1997, charities whose energy is used "otherwise than in the course or furtherance of a business" for at least 60% of its actual use can receive all their power supplies at the reduced rate³. However Make It Cheaper's figures⁴ show that 30% of 250 charities surveyed were unaware of this, and a further 5% did not realise that they need to submit a VAT Declaration form to their supplier in order to qualify. Only by successfully applying for the VAT reduction are charities then made exempt from Climate Change Levy (CCL) which is automatically added to non-domestic bills at the rate of 0.47p per Kilowatthour (kWh) for electricity and 0.164p per kWh for gas.

Jonathan Elliott, managing director of Make It Cheaper, explains: "There's £100 million up for grabs but if you don't ask, you don't get. Charities should check their bills for the VAT rate they're paying and, if it's wrong, get on to their supplier as a priority in the New Year. Even those that have been proactive in the past are often reverted back to the full rate by mistake. It also pays to look at your unit rate while you've got a bill in hand. For electricity, these can range from seven pence to over 20 pence but it costs nothing to shop around and, if necessary, switch."

Stephen Holmes, VAT specialist at Adler Shine LLP accountants, added: "According to figures produced by the Charity Tax Group, the proposed increase in the standard rate of VAT to 20% will cost the sector £143m in irrecoverable VAT. This is a very serious burden for charities that might be easier to bear if they, or their advisors, take a moment to read their energy bills."

Make It Cheaper has published a VAT advisory guide for energy bill payers which includes details of qualifying organisations, a standard 5% VAT Declaration form and contact details for all the major energy suppliers. www.makeitcheaper.com/charityVAT

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¹ Number of charities: There are 180,000 Registered Charities according to the Charity Commission (www.charity-commission.gov.uk/) but any charity is eligible as long as they are recognised as having charitable status by HMRC.  

² How the figures are calculated:

Total charity sector electricity spend = 180,000 (number of charities) x 33,516 kWh (average consumption) x 10p/kWh (average cost) = £603,288,000

If paying 17.5% VAT x £603,288,000 = £105,575,400

If paying 5% VAT x £603,288,000 = £30,164,400

Difference £105,575,400- £30,164,400 = £75,411,000

£75,411,000 x 30% (unaware) = £22,623,300 VAT overpayment

Total charity sector spend CCL if no VAT declaration = 180,000 (charities) x 33,516 kWh (average consumption) x 0.47p/kWh (current CCL rate) = £28,354,536

£28,354,536 x 30% (unaware) = £8,506,360 CCL overpayment

³ 'Non-business use' is where no charge is made for products or services offered by the charity or where the only income is a non-business grant (e.g. a day centre for the elderly funded by Social Services) or voluntary donations. It also includes the provision of welfare services to all distressed people for the relief of their distress, and if provided consistently below cost, i.e. at least 15% (this includes services for the elderly, infirm, handicapped people, the chronically sick and the poor). Business activities, on the other hand, include fund-raising activities where goods or services are given in return for payment - such as rent, admission fees, catering or a jumble sale. More info at www.hmrc.gov.uk/charities/vat/fuel-power.htm

⁴ Q. Are you aware that Registered Charities can qualify for a discounted rate of 5% VAT on the energy they use for 'non-business'? Yes 70.4%, No 29.6%

Q. Did you know it is as simple as signing a declaration form and sending it to your supplier to qualify for the 5% rate? Yes 65.4%, No 34.6%

Q. Have you done this? (Signed a declaration form) Yes 61.6%, No 38.4%

Q. Is this something you would like further information on? Yes 40.5%, No 59.5%

Other Case Studies:

• CHICKS (Country Holidays for Inner City Kids) is a children's charity that aims to provide life enhancing respite breaks to as many disadvantaged children as possible at retreats in Devon and Cornwall. Electricity consumption is 30,000 kWH, spending about £3,000 a year. Have just switched from Eon to Opus via Make It Cheaper but is unsure of VAT rate and so has requested a VAT Declaration form to be sent from Opus. Nikki Quirk, CHICKS Charity, Tavistock, PL19 0LX nikki@chicks.org.uk / 01822 810518.

• Harrow Carers is the leading carers support organisation in Harrow. Since 1996, it has developed a network of services and support for carers to reduce the burden and increase the life chances of unpaid carers. These are people who provide support for people in the community who are ill, frail, disabled and disadvantaged in many ways. Just moved premises and so currently paying the higher 'out-of-contract' energy rates and unsure of VAT rate but looking to sort out both as soon as possible via Make It Cheaper.  Mike Coker, Harrow Carers Centre, 25-27 Pinner Green, Pinner, Middlesex, HA5 2AF. mike.coker@harrowcarers.org / 0208 868 5224

About Make It Cheaper

Established in 2007 and based in Central London, Make It Cheaper receives more utility price comparison enquiries (2,000 a week) and arranges more new contracts (1,000 a week) than any other business-only price comparison service. These enquiries include those from the business customers of most of the major domestic price comparison services as well as business membership organisations, charities and trade associations. Acting on behalf of these customers with total impartiality and free of charge, Make It Cheaper offers cost savings across a range of products including business electricity, business gas, insurance and telecoms. The prices it offers are often better than could be found by going direct to suppliers because of the volume of deals its negotiates. Make It Cheaper was recently a finalist for 'SME of the Year' at the National Business Awards, 'Young Company of the Year' at the CBI's Growing Business Awards and 'B2B Customer Service Team' at the National Customer Service Awards.

Further information: Nick Heath 020 7654 0730 / 07720 297972 / nick.heath@makeitcheaper.com