Value Added Tax (VAT) is a form of tax imposed by the government on all services and goods which are bought or sold for use or consumption. As such, it covers a wide range of areas, including sport, utilities, transport and financial services. Whilst the majority of businesses in the UK are subject to VAT, there are some exemptions that you need to be aware of, especially when it comes to your business energy VAT rates.
VAT on energy covers all electricity and gas used for business purposes. Furthermore, despite this being a business-to-business transaction, VAT on business electricity and gas can’t be claimed back. But there are specific circumstances where you may be exempt. These circumstances range from environmental factors to the industry in which your business rates, but unless your business qualifies for an exemption, you will be required by law to pay VAT on business gas and electricity bills.
Whilst not very common, there are instances in which your business may be exempt from paying VAT on energy. For example, if approximately 60% or more of your business electricity and gas consumption is used in a specific area highlighted by the government, then you may be eligible for reduced business VAT. They are highly controlled and monitored, ensuring no foul play. Such exemptions include:
- Buildings that are the main place of residence for 90% of the people inside it, such as care home, student accommodation and places of rehabilitation
- Places of worship, including nunneries and monasteries
- Self-catering accommodation, including caravans
- Free schools and educational academies
- Places of business that are also your home
Reflecting the many different types of businesses now operating in the UK, VAT on business electricity and gas also comes in a variety of packages. One such deal is known as ‘Mixed Use’.
Mixed use refers to businesses that use their premises for a number of different reasons. For example, you will qualify for business VAT exemption if the majority of your energy usage (60%) is for reasons that qualify for exemption.
For example, if one part of your business premises is used as a care home with a section for offices, then you will receive an energy VAT reduction for the part of your building being used as a care home.
What’s more, as well as being eligible for this discounted rate, businesses, charities and other non-profit organisations are often exempt from other charges, such as the Climate Change Levy – which could reduce your energy bills by approximately 20%.
The Climate Change Levy does affect business energy VAT, so you should make sure you are familiar with everything involved. The Levy is a form of tax designed to promote energy efficiency and reduced emissions among businesses in the UK. This means that if you qualify, you may not have to pay the Climate Change Levy.
For businesses that do not qualify for this discount, but which are committed to achieving the same levels of energy efficiency, there is a Climate Change Agreement (CCA). This agreement means you will get a reduction on tax if you agree to make certain improvements regarding your businesses’ energy efficiency. So, not only do you lessen your impact on the environment by lowering emissions, you decrease your consumption and lower your outgoings.
Whilst VAT on business energy is usually charged at 20%, there are certain instances in which a business can qualify for a reduced rate. This means that if your business qualifies for this rate, you will only be required to pay the standard 5% domestic rate.
In addition to the qualifying criteria already laid out above – such as what industry your business operates in and what is done on your premises – businesses with energy usage below what is known as the ‘De minimis’ level will also be considered for the reduced 5% VAT rate.
To achieve this, you must use no more than 33kWh of electricity and 145kWh of gas. Put simply, this means per month you must use less than 1000kWh of electricity and 4397kWh of gas.