Umair Gaines
The UK's Value Added Tax (VAT) is a government tax on goods and services bought or sold for use by individuals and businesses. The standard VAT rate is 20%, but there are some exceptions where supplies to businesses may be eligible for a discounted rate of 5%. This includes businesses that use a limited amount of electricity, charities, non-profits, and those with low energy usage. For example, if your average daily usage is no more than 145 kWh of gas and 33 kWh of electricity, you may qualify for the discounted rate. This discount is not applied automatically, so eligible businesses must apply.
| Characteristics | Values |
|---|---|
| VAT rate on electricity for domestic use | 5% |
| VAT rate on electricity for commercial use | 20% |
| VAT rate on electricity for charitable institutions | 5% |
| VAT rate on electricity for businesses with a turnover of less than £85,000 per year | 5% |
| VAT rate on electricity for businesses with a high energy usage | 20% |
| VAT rate on electricity for businesses with a low energy usage | 5% |
| VAT rate on electricity for businesses that use solar panels | Discounted rate |
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What You'll Learn
VAT rates for commercial vs. domestic use
The VAT rate on electricity depends on whether it is for commercial or domestic use. Commercial electricity use is typically subject to a 20% VAT rate. However, businesses that use less than 33 units of electricity per day or have low overall energy usage may be eligible for a reduced VAT rate of 5%. This reduced rate also applies if the business is a charitable or non-profit organisation or if the electricity is used for charitable non-business activities.
On the other hand, electricity for domestic use is generally subject to a reduced VAT rate of 5%. This includes electricity used in dwellings such as houses, caravans, houseboats, and certain types of residential accommodation like children's homes, hospices, and halls of residence for university students. Local authority tenants are exempt from paying VAT on their accommodation and, therefore, do not pay VAT on their electricity bills.
If a property has combined commercial and domestic use, customers can apply to pay the 5% VAT rate for the domestic portion of their bill. They must declare the percentage of electricity used for domestic purposes since the meter cannot show this separately.
It is important to note that the VAT rate for electricity is determined by overall energy usage, so there may be variations in the exact rates paid by different consumers and businesses.
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VAT discounts for charitable institutions
The standard VAT rate for energy costs is 20%, but charitable institutions can benefit from a reduced rate of 5% or even 0%. Charities pay VAT on all standard-rated goods and services they buy from VAT-registered businesses, but they are eligible for a reduced rate on some goods and services.
Charities pay 5% VAT on fuel and power for residential accommodation, charitable non-business activities, and small-scale use. Residential accommodation includes children's homes, care homes for the elderly, and hospices. Non-business activities include free daycare for disabled people and spiritual welfare provided by a religious institution. Small-scale use refers to up to 1,000 kilowatt-hours of electricity per month or a delivery of 2,300 litres of gas oil. If less than 60% of the fuel and power are used for qualifying activities, the charity will pay a reduced rate on the qualifying part and the standard rate on the rest.
Charities can also benefit from other VAT exemptions and discounts. For example, the sale of advertising space in brochures or programmes for a fundraising event is exempt from VAT, and the income from the hire or loan of staff from one charity to another can be treated as non-business and outside the scope of VAT under certain conditions. Additionally, charitable institutions may be exempt from the Climate Change Levy (CCL), which is an additional tax levied on gas and electricity for both business and non-business customers.
It is important to note that the eligibility criteria and specific discounts may vary depending on the location and specific activities of the charitable institution. To determine the exact VAT discounts and exemptions applicable, charitable institutions should refer to the relevant government websites or consult with their energy suppliers.
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VAT and business electricity bills
The rate of VAT on energy bills is determined by the amount of energy consumed. Businesses will pay VAT on business electricity if their annual turnover is more than £85,000 per year. The standard rate of VAT for businesses is 20%. However, some businesses may be eligible for a discounted rate of 5% if they meet certain criteria. For example, if a business uses less than 33 units of electricity a day (around 3,000 units a quarter) or less than 1,000 kWh of electricity every month, they will pay 5% VAT. This rule applies whether the business in question uses electricity for commercial or domestic purposes.
Businesses that qualify for the discounted rate include charitable or non-profit organisations and those that use at least 60% of their energy for domestic purposes, such as a care home or self-catering holiday accommodation. Additionally, if a business's energy meter is primarily used for charitable non-business activities, they may also be eligible for the discounted rate. It is important to note that businesses must apply to their energy supplier to determine if they qualify for a reduced rate.
Furthermore, businesses that pay the 20% VAT rate and are in a CCL-targeted industry will also pay the full CCL rate. The CCL is an additional electricity tax designed to encourage businesses to be more conscious of their carbon footprint. However, certain businesses may claim exemption from the CCL.
VAT is not charged on some items, such as postage stamps, financial transactions, and property transactions. Additionally, local authority tenants do not pay VAT on their accommodation, including the cost of heating, as it is not considered a business activity.
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VAT on energy bills: reduced rates
The rate of VAT on energy bills is determined by the amount of energy consumed. Domestic customers or businesses that use a lot of energy will pay a much higher rate of VAT than those who use less energy. The flat rate for VAT on energy bills in the United Kingdom is 20%. However, some consumers and small businesses are eligible for a discounted rate of 5%.
Domestic VAT Rates
VAT on gas and electricity for domestic use is charged at a reduced rate of 5%. This includes gas and electricity used in dwellings such as houses, caravans, and houseboats, as well as in certain types of residential accommodation, such as children's homes, hospices, monasteries, nunneries, and university halls of residence. Local authority tenants do not pay VAT on their energy bills when the local authority provides the accommodation.
Business VAT Rates
Businesses are typically charged VAT on energy at a rate of 20%. However, some businesses may be eligible for a reduced rate of 5% if they meet certain criteria, such as having low energy usage or using energy for charitable or domestic purposes. Businesses that are charitable institutions or have a turnover of less than £85,000 per year may also be eligible for a discounted rate. To qualify for a reduced VAT rate on business energy, businesses must submit a VAT declaration form.
VAT Exemptions
Certain items are exempt from VAT, such as postage stamps, financial transactions, and property transactions. Additionally, tenants who are separately charged for metered supplies or have coin-operated gas or electricity meters will be charged VAT at a reduced rate when supplied for domestic use or in small quantities.
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VAT on electricity for landlords
The standard rate of VAT on electricity in the UK is 20%. However, for landlords, the application of VAT on electricity depends on various factors, including the type of accommodation, the metering system, and the usage.
If a landlord provides heated, air-conditioned, or cooled accommodation with a fixed charge for electricity, it is considered a single supply of accommodation. In this case, the electricity charge is treated as part of the rent and is exempt from VAT, similar to the rent charged for domestic accommodation.
On the other hand, if tenants have separate metered supplies or coin-operated meters, the electricity supply is subject to VAT. The VAT rate depends on whether the electricity is for domestic use or falls under the category of small quantities. For domestic use, the VAT rate is reduced to 5%. Small quantities of electricity are defined as not exceeding an average rate of 33 kilowatt-hours per day or 1,000 kilowatt-hours per month per customer or premises.
Local authority tenants are exempt from paying VAT on their electricity bills, as the supply of electricity by local authorities is outside the scope of VAT. Additionally, if a landlord's business qualifies as a charitable or non-profit organisation, it may be eligible for a 5% VAT rate on electricity. Low energy usage may also be a factor in determining eligibility for a reduced VAT rate.
It is important to note that tenants should refer to their tenancy agreements to understand their obligations regarding electricity charges. Landlords cannot charge tenants more than they have paid for electricity, and tenants can challenge any excessive charges.
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Frequently asked questions
The VAT rate on electricity for businesses is 20% by default. However, some businesses may be eligible for a discounted rate of 5% if they meet certain criteria, such as having a low energy usage or being a charitable or non-profit organisation.
To be eligible for a discounted VAT rate, businesses typically need to meet certain criteria, such as having a low energy usage or being a charitable organisation. Businesses should contact their energy supplier to discuss their specific circumstances and determine if they qualify for a reduced rate.
The VAT rate on electricity for domestic customers is typically 5%. This rate applies to dwellings such as houses, caravans, and houseboats, as well as certain types of residential accommodation. Local authority tenants are exempt from paying VAT on their heated accommodation.
