Umair Gaines
Businesses in the UK are charged VAT on their energy bills, which includes electricity. The standard rate of VAT on business electricity is 20%, however, some businesses may qualify for a reduced rate of 5%. This reduced rate is applicable to businesses that use less than 145 kWh of gas per day or less than 1000 kWh of electricity per month. Charities and non-profit organisations that use energy for non-business purposes are also eligible for the reduced rate. Additionally, businesses with a ''mixed-use' property, i.e., used for both domestic and business purposes, can apply for the reduced rate. Businesses that are VAT-registered can reclaim the VAT they pay on their energy bills from the government.
Do you pay VAT on business electricity?
| Characteristics | Values |
|---|---|
| Default VAT rate | 20% |
| Reduced VAT rate | 5% |
| VAT rate for charities and non-profit organisations | 5% |
| VAT rate for low energy users | 5% |
| VAT rate for businesses with mixed use | 5% |
| VAT rate for businesses with annual turnover of more than £85,000 | 20% |
| VAT rate for businesses that generate their own energy | 0% |
| CCL VAT rate | 0.775 p/kWh |
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What You'll Learn
VAT on business electricity is 20% by default
As a business operating in the UK, you will likely have to pay VAT on your electricity bills. The standard rate of VAT on business electricity is 20% by default. This means that, unless you meet certain criteria, your electricity bills will be taxed at 20% on top of the cost of the electricity itself.
However, some businesses may qualify for a reduced rate of 5% VAT on their electricity bills. This reduced rate is available to businesses that use small amounts of energy. The specific threshold for this reduced rate is less than 1,000 kWh of electricity per month (or 33 kWh per day). If your business uses less than this amount of electricity, you may be eligible for the reduced rate.
Additionally, charities and non-profit organisations that use energy for non-business purposes may also qualify for the reduced rate of 5% VAT. In this case, the energy usage does not need to fall below the threshold, but the organisation must provide a valid VAT certificate.
It's important to note that the reduced rate of 5% VAT may not be automatically applied to your bills. You may need to declare your eligibility to your electricity supplier and complete a VAT declaration form.
Furthermore, there are separate charges and exemptions that may apply to your business electricity bills, such as the Climate Change Levy (CCL) and the De Minimis principle. The CCL is an additional tax on non-domestic energy bills, currently set at 0.775 p/kWh for electricity. The De Minimis principle states that if energy consumption falls below a certain threshold, it is considered domestic use and is charged at a reduced VAT rate of 5%.
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Charities and non-profits are eligible for a reduced rate of 5%
Charities and non-profit organisations are eligible for a reduced VAT rate of 5% on their energy bills. This is because the UK government recognises that these organisations often use energy for 'non-business' purposes.
VAT (value-added tax) is a tax levied on the cost of a good or service, including electricity from a supplier. The standard rate of VAT is 20%. However, charities and non-profits are eligible for a reduced rate of 5% if they meet certain criteria. This includes using energy for 'non-business' purposes, such as charitable activities or providing residential accommodation for vulnerable groups.
To be eligible for the reduced rate, charities and non-profits must complete a VAT declaration form and submit it to their energy supplier. It's important to note that energy suppliers do not automatically apply these discounts, so organisations must be proactive in seeking out and applying for these reduced rates. Additionally, if there is a mix of business and non-business use at the property, the split will need to be calculated and declared.
Furthermore, charities and non-profits may also be exempt from the Climate Change Levy (CCL), which is a separate tax charged on non-domestic energy bills. This exemption can result in significant savings for these organisations. It is always recommended that charities and non-profits review their energy bills and seek advice to ensure they are paying the correct amount of VAT and taking advantage of any eligible reductions or exemptions.
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Businesses using solar panels can claim back VAT
As of April 2022, the VAT for solar panels and heat pumps in the UK has been reduced to 0%. This exemption covers both purchase and installation costs, under the UK government's Energy Saving Measures (ESMs).
Chancellor Rishi Sunak announced cutting VAT from five per cent to zero upon installing energy-efficient systems such as solar panels, with the scheme lasting until 2027. This means that even when the 0% rate ends in 2027, you’ll still pay less VAT on solar panels than you did before April 2022.
VAT-registered organisations can claim the VAT on solar panels back on their quarterly returns. Businesses can recover the VAT paid on installations through input tax claims if the panels are used for taxable business activities. This can mitigate the impact of the initial 20% VAT charge.
To claim back the VAT, you must:
- Keep detailed records: Maintain all receipts and invoices related to the purchase and installation of the solar panels. These documents must clearly show the VAT charged.
- Complete a VAT return: Include the reclaimable VAT amount in your VAT return form under the appropriate sections. The total VAT amount reclaimed will be deducted from the VAT you owe to the government.
- Submit the VAT return: Submit the VAT return to HM Revenue and Customs (HMRC) by the deadline. Returns can usually be filed online, which is faster and allows for quicker processing.
- Receive your VAT refund: If your total VAT reclaimed exceeds the VAT due in the period, you’ll receive a VAT refund from HMRC. Refunds are typically processed within 30 days of submitting the return.
There are time limits for reclaiming VAT, so ensure you file within the specified period from the date of purchase. If you use the solar panels for both taxable and exempt activities, partial exemption rules may apply.
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The Climate Change Levy is an additional electricity tax
The Climate Change Levy (CCL) is a tax on energy delivered to non-domestic users in the United Kingdom. It was introduced on April 1, 2001, under the Finance Act 2000, with the aim of reducing annual emissions by 2.5 million tonnes by 2010. The levy is part of the UK's Climate Change Programme and applies to most energy users, excluding the domestic and transport sectors. The CCL is included as a separate charge on energy bills and is currently set at 0.775 p/kWh for both electricity and gas. This rate is reviewed and adjusted annually by the government to encourage businesses to reduce their carbon footprint.
The CCL is charged in addition to the standard 20% VAT rate applied to business electricity prices. While 20% is the default VAT rate, some businesses may qualify for a reduced rate of 5%. This reduced rate applies to charities and non-profit organizations that do not engage in business activities, as well as small energy users who consume less than a certain threshold. Businesses that use less than 145 kWh of gas per day or fall under the ''De Minimis' principle set by HM Revenue and Customs are eligible for the reduced VAT rate.
It is important to note that the CCL and VAT are separate charges. If a business is charged the CCL, they will also be subject to VAT at the standard rate of 20%. Additionally, the CCL charge itself is taxable for VAT, resulting in an additional VAT cost on top of the CCL. This means that for each 0.775p/kWh of the CCL charge, businesses will also pay 0.155p/kWh in VAT.
Businesses should be aware of their eligibility for any discounts or exemptions on their energy bills. For example, charitable organizations or those with low energy consumption may be eligible for a VAT rebate or a reduced rate. Businesses can apply for a reduced VAT rate by completing a VAT declaration form and submitting it to their energy supplier. By staying informed about these energy tax details, businesses can effectively manage their energy costs and make more sustainable choices.
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Businesses can save on VAT by working from home
Businesses in the UK typically pay a 20% VAT rate on their electricity bills. However, if you run your business from home, you can save on VAT by claiming back the VAT on legitimate business expenses. This includes extra costs incurred from running your business from home, such as a proportion of your utility bills and running costs.
To determine the proportion of VAT that can be reclaimed, calculations must be "fair and reasonable". This can be estimated based on factors such as floor area, the number of rooms, and time usage. For example, if your home office occupies 20% of your home's floor space, you can reclaim 20% of the VAT on your utility bills.
It is important to note that businesses must keep records and valid VAT invoices to support their VAT claims. Additionally, sole traders or partners are considered the same as the business by HMRC, while directors must ensure that bills are in the company's name and reimburse the company for private use to avoid tax and National Insurance contributions issues.
By working from home, businesses can also save on VAT by taking advantage of reduced rates for charitable non-business or domestic use. If energy consumption falls below the De Minimis level, it is considered domestic use by HMRC and is charged at a reduced VAT rate of 5%.
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Frequently asked questions
Yes, businesses have to pay VAT on electricity.
The standard VAT rate for business electricity is 20%. However, some businesses may qualify for a reduced rate of 5%.
Your business may be eligible for the reduced VAT rate if it meets one of the following conditions:
- Your business is used for both domestic and business purposes ('mixed use').
- Your business falls under the category of 'de minimis', which means your energy usage drops below a certain level.
- Your business uses lower than 33kWh of electricity (1,000 kWh per month).
- Your business is a charity or not-for-profit organisation.
- Your business is a children's home (hospitals and prisons are excluded).
To apply for a reduced VAT rate, you will need to complete a VAT declaration form and submit it to your energy supplier. You may also need to provide a separate form for each qualifying property.
If your business is VAT-registered, you can reclaim the VAT you pay on your business electricity bills. However, if you are not VAT-registered, you cannot claim back the VAT.
