Are you paying the right VAT rate on your business energy bill?
Value Added Tax (VAT) - we’ve all seen it on our bills and receipts, but did you know there are different rates when it comes to VAT on your business energy bills? All UK businesses need to pay VAT on their business electricity usage, which is usually charged at a 20% standard rate. VAT that’s paid on business energy can’t be claimed back; however, your business might be eligible for a reduced rate of 5% if it meets certain criteria.
20% versus 5% VAT
The current standard rate for VAT on business energy bills is 20%, but if you can answer yes to any of the following questions, then your business may fall into the 5% VAT bracket.
Do you have low energy usage? If so, you may meet the ‘de minimis’ requirements which means your average daily electricity consumption is no more than 33 kilowatt-hour(kWh) or less than 1000kWh per month. By consuming less than the de minimis level, your usage will be classed as the same as domestic use and that is charged at the reduced rate of 5% VAT.
Are you classed as a charity or non-profit? Under either of these categories, VAT will normally be charged at 5%. As a charity or non-profit organisation that doesn’t charge for services, you will likely be recognised as ‘non-business’ which attracts the reduced rate. If you’ve been overpaying and weren’t aware of it, you could also be eligible for a rebate for up to four years of payments.
Is your business premises mixed use? By mixed use, we mean that your business premises are used for different purposes, for example, you run a shop on your building’s ground floor and have a first-floor flat that you rent out. If this is you then you will qualify for the reduced VAT rate if 60% of your energy consumption is for domestic purposes.
A little more on exemptions
Let’s look in more detail at the types of charities and businesses that the reduced 5% VAT rate applies to: armed forces residential accommodation; caravans and houseboats; children's homes; homes for the elderly and disabled; hospices; houses, flats, or other dwellings; monasteries, nunneries, and similar religious communities; school and university residential accommodation for students and pupils, self–catering holiday accommodation.
If you’ve answered yes to any of these then there is potential that your organisation may qualify for a reduced VAT rate of 5% on your business electricity use. Your next step is to submit a VAT declaration form that your supplier can provide.
Plus, if you do qualify for a reduced VAT on your business energy, you might also be exempt from paying the Climate Change Levy (CCL) Climate Change Levy (CCL). This is a UK-specific tax that was introduced by the government in 2001 to encourage businesses to improve their energy efficiency and reduce carbon emissions. If your business energy consumption is considered de minimis, it won’t attract a CCL charge.