VAT for business gas and electricity
Value Added Tax – better known as VAT - is a tax levied by the government on the majority of goods and services.
If you run or own a VAT-registered business, you will typically include 20% VAT in the price of all goods and services your customers purchase. Every three months, you will need to pay this VAT to HM Revenue and Customs (HMRC).
In many cases, you’ll also pay VAT on goods and services you procure from other businesses, but due to the nature of these purchases you’ll be able to claim that VAT back from the HMRC. Unfortunately, the same does not apply when it comes to the business gas and electricity you essentially buy from an energy supplier - which is why it's important to ensure you're getting the best business electricity rates from your supplier.
How much VAT do you pay on gas and electricity?
All businesses will need to pay some level of VAT on their electricity and gas bills. While most business energy users will pay VAT at a rate of 20%, some organisations are eligible to pay a lower amount. In most cases, your business energy supplier will automatically add the VAT you’re required to pay to your bill - although if you qualify for any additional discounts it’s likely you’ll have to apply for these separately.
Should my business be VAT registered?
Businesses that have a taxable turnover of more than £82,000 per year must register for VAT by law. Businesses with an annual turnover of less than this can voluntarily register themselves for VAT.
Visit the Government website for helpful guides on when you should register for VAT.
Paying VAT at a reduced rate
You may be eligible to pay a reduced rate of VAT on your energy bills if you meet certain requirements – typically relating to your consumption or the sector you work in. This reduced rate is 5% rather than the standard 20%, and it’s likely you’ll qualify for the discount if:
- You meet the ‘de minimis’ requirement – this refers to low energy consumption, as explained below.
- The majority of the energy you consume is used in a domestic setting.
- You are a charitable or non-profit organisation.
You are regarded as having low energy consumption if:
- On average, your business electricity usage is below 33kWh per day, or 1,000kWh per month.
- On average, your business gas usage is below 145kWh per day, or 4,397kWh per month.
If you are found to qualify for the reduced rate due to your usage, your supplier should automatically apply the reduced rate to your bill – but you’ll have to check with them to ensure this is the case.
Find out how you can reduce your business's energy consumption with our business eco guide.
Services provided by charitable organisations are regarded as ‘non-business’, making them automatically eligible to pay a reduced rate of VAT on their business gas and electricity. If your organisation qualifies for the VAT discount, you’ll automatically be exempt from paying the Climate Change Levy too (see below).
You will need to fill in a VAT Declaration Form to register your eligibility to pay the lower rate of VAT – you can obtain this from your energy supplier. If you find you have been overpaying VAT, you can claim a rebate for the money you’ve paid unnecessarily, either from your energy supplier or from HMRC. The VAT Declaration Form is also used to apply for this rebate, with which you can claim for any overpayments in the past four years.
How to apply for the lower amount of VAT
If you think you should be paying a lower amount of VAT, you can download your supplier’s VAT declaration form below.
VAT for ‘mixed use’ energy
If your business premises is only partly used for business purposes, and partly used for domestic purposes, then you may be classed as having ‘mixed use’ energy. If at least 60% of your business’s energy is used for domestic purposes – also known as qualifying use – then there’s a good chance you’ll be eligible for a reduced, 5% rate of VAT. If less than 60% of your business’s energy is used for domestic purposes, then you may pay 5% VAT on that proportion of energy, and 20% on everything else.
For example, if 45% of your energy is used for domestic purposes, then you would pay 5% VAT on that 45% of your energy bill. You would pay the standard 20% VAT on the remaining 55% of your usage.
What is the Climate Change Levy?
The Climate Change Levy (CCL) is a tax designed to encourage energy efficiency and reduced gas emissions for businesses. If you qualify for a reduced rate of VAT on your business electricity and gas, you will probably also qualify for exemption from the main rate of CCL, which should lower the cost of your bills even further.
Click here to find out what the current CCL rates are.
If you do not currently qualify for CCL exemption, you may be able to sign a Climate Change Agreement (CCA) in order to qualify for a discount on the tax. In a CCA, you will have to agree to make certain energy efficiency improvements to reduce your business’s consumption and emissions. Click here for more information on Climate Change Agreements.
For more information on other grants that may be available to your business, or ways that you can reduce the amount of energy that you;re using, try our guide to small business energy efficiency.