Umair Gaines
Value Added Tax (VAT) is a UK consumption tax charged at 20% on most goods and services sold in the country. Businesses with a taxable turnover of over £85,000-£90,000 must register for VAT and pay this quarterly to the government. The VAT is then passed on to the customer in the price of goods and services. Businesses can also reclaim the VAT they pay on their purchases, including energy bills. However, the standard VAT rate for electricity and gas supplied to commercial buildings is 20%, but some businesses may be eligible for a discounted rate of 5%.
| Characteristics | Values |
|---|---|
| What is VAT? | Value Added Tax, a UK consumption tax charged at 20% on most goods and services. |
| VAT on business electricity bills | 20% |
| VAT on business gas bills | 20% |
| Reduced VAT on business electricity bills | 5% |
| Reduced VAT on business gas bills | 5% |
| De minimis level for electricity consumption | 33 kWh per day, 1000 kWh per month, 12,000 kWh per year |
| De minimis level for gas consumption | 145 kWh per day, 4397 kWh per month, 52,764 kWh per year |
| Reasons for reduced VAT | At least 60% of energy used for dwelling or residential accommodation, charitable or non-profit organisation, or low energy user |
| VAT on Climate Change Levy (CCL) | 0.775 p/kWh for electricity and gas, plus 0.155 p/kWh in VAT |
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What You'll Learn
- The standard VAT rate for businesses is 20%
- Businesses that use minimal energy may be eligible for a discounted rate of 5%
- Businesses can reclaim VAT as input tax on expenses
- The Climate Change Levy (CCL) is a separate tax charged on non-domestic energy bills
- Charities and non-profit organisations may be eligible for a reduced VAT rate
The standard VAT rate for businesses is 20%
The standard rate of Value Added Tax (VAT) in the UK is 20%. This applies to most goods and services sold in the country. Businesses play a crucial role in administering and collecting VAT, with most businesses being VAT-registered and charging VAT to their customers, which they pay quarterly to the government.
VAT is a consumption tax, meaning that the rate is determined by the amount of energy consumed. This means that businesses that consume a lot of energy will pay a higher rate of VAT than those that consume less. Energy suppliers charge more for business energy, assuming that most businesses will use more than 33 electricity units or 145 kWh of gas per day. If this is the case, the business will pay VAT at the standard rate of 20%.
However, some businesses may be eligible for a discounted or reduced rate of 5%. This includes businesses that use a minimal amount of energy, known as the 'de minimis' level, as well as charities or non-profit organisations, and businesses that use energy for dwelling or residential accommodation. To qualify for the discounted rate, businesses must meet certain criteria and apply for the reduction separately.
It is important to note that VAT-registered businesses can reclaim the VAT they pay on their purchases, including energy bills, subject to the normal rules on VAT deduction. This means that VAT-registered businesses are usually indifferent to the VAT charged on energy bills as they can reclaim this amount from the government.
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Businesses that use minimal energy may be eligible for a discounted rate of 5%
The standard rate of VAT on business electricity bills is 20%. However, the UK government offers a discounted rate of 5% for businesses that use minimal energy. This is known as the ''de minimis' level, and it applies if a business uses less than a certain amount of energy.
For electricity, the de minimis level is 33 kilowatt-hours per day, 1,000 kilowatt-hours per month, or 12,000 kilowatt-hours per year. If a business uses less than this amount of electricity, they may be eligible for the discounted rate.
The de minimis level for gas is lower, at 145 kilowatt-hours per day, 4,397 kilowatt-hours per month, or 52,764 kilowatt-hours per year.
It's important to note that the reduced VAT rate for energy is not just based on the quantity used but also on the nature of the business and how the energy is being used. For example, if at least 60% of a business's energy is used for dwelling or residential accommodation, or if the business is a charity or non-profit organisation, they may also qualify for the reduced rate.
Businesses that believe they meet the criteria for the discounted VAT rate should check with their energy supplier to ensure they are on the correct tariff. If a business has been paying the standard rate when it was eligible for the reduced rate, it may be possible to claim a refund on overpayments made during the previous four years.
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Businesses can reclaim VAT as input tax on expenses
The flat rate for VAT on business electricity bills is 20% of the usage. However, the UK government offers a reduced rate of 5% VAT for businesses that use a minimal amount of energy, known as the ''de minimis' level. To meet this amount, a business will need to keep electricity consumption under 33 kWh per day, 1,000 kWh per month, and 12,000 kWh per year. This lower VAT rate should be applied automatically, but it is always worth checking your bill and ensuring that you are on the correct rate. If you are eligible for the discounted rate but are still being charged the higher rate, get in touch with your supplier.
There are other situations where businesses may pay reduced VAT on gas and electricity bills. These include:
- At least 60% of the business's energy is used as household energy.
- The business is a charity or not-for-profit organisation.
- Business premises are also the place of residence for 90% of the people inside, such as student accommodation, places of rehabilitation, and care homes.
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The Climate Change Levy (CCL) is a separate tax charged on non-domestic energy bills
The standard rate of VAT on energy bills for businesses is 20%. However, the UK government offers a discounted rate of 5% for businesses that use a minimal amount of energy. This discounted rate is called the 'de minimis' level, and it applies if a business uses less than 33 kWh of electricity per day, 1,000 kWh per month, or 12,000 kWh per year.
The CCL charge is also taxable for VAT, so for each 0.775 p/kWh of the CCL charge, businesses will also pay 0.155 p/kWh in VAT. This means that if a business is charged the CCL, they will also pay VAT at 20%. Businesses must register for the Climate Change Levy, and failure to do so or non-payment of the levy will result in a penalty of £250 for each missed payment.
The CCL main rates are listed on business energy bills, and there are certain exemptions and reliefs available. Electricity, gas, and solid fuel are usually exempt from the main rates of CCL if they are supplied to or from specific combined heat and power (CHP) schemes registered under the CHP Quality Assurance (CHPQA) programme. Other exemptions include electricity generated from renewable sources before August 1, 2015, and electricity used to produce electricity in generating stations with a capacity of 2MW or greater. Businesses can also get a reduction on the main rates of CCL if they are energy-intensive and have entered into a climate change agreement with the Environment Agency.
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Charities and non-profit organisations may be eligible for a reduced VAT rate
To be eligible for the reduced rate, charities must use less than 4,397 kWh/month of gas or 1,000 kWh/month of electricity. This is called the ‘de minimis’ level. If a charity uses more energy than this, they can still be eligible for a reduced VAT rate if more than 60% of the electricity used in a year is for charitable activities. In this case, VAT on all electricity bills will be at the lower rate of 5%. If less than 60% is for charitable activities, then the VAT on the electricity bill will be split, with the qualifying percentage at 5% VAT, and the remainder at 20%.
Charities and non-profits are also exempt from the Climate Change Levy (CCL), which is a separate tax charged on non-domestic energy bills. This also reduces bills by 5%. It is important to note that these discounts are not applied automatically, and charities must inform their energy supplier and fill out a VAT Declaration form.
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Frequently asked questions
VAT stands for Value Added Tax and is a UK consumption tax charged at 20% of the value of most goods and services sold in the UK. Businesses must pay VAT on their energy tariffs, and electricity prices are subject to a 20% charge for VAT as standard.
The UK government offers a reduced rate of 5% VAT for businesses that use a minimal amount of energy, known as the 'de minimis' level. To meet this amount, a business will need to keep electricity consumption under 33kWh per day, 1000kWh per month, and 12,000kWh per year.
The Climate Change Levy is a separate tax charged on non-domestic energy bills. It is currently 0.775 p/kWh for both electricity and gas. The CCL charge is also taxable for VAT, so for each 0.775 p/kWh of the CCL charge, you’ll also pay 0.155 p/kWh in VAT.
