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12 Aug 2020
Steve Ramsey avatar Steve Ramsey

Business energy VAT rates

Man calculating VAT on business energy

VAT is normally charged at 20% on business energy. But in certain circumstances a business energy customer can qualify for a reduced VAT rating and only needs to pay the domestic rate of 5%.

Should I pay VAT on business energy?

Value Added Tax (VAT) on energy covers all electricity and gas used for business purposes. And despite it being a business-to-business transaction, VAT on business electricity and gas can’t be claimed back.

The VAT cost is automatically added to your business energy bills. Because most businesses in the UK are subject to business energy VAT at 20%, your supplier will assume that your business has to pay it too.

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You will pay VAT at 20% on your business gas and electricity bills, unless:

  • You qualify for a reduction

  • Your premises qualify as ‘mixed use’

  • Your business qualifies under what’s called ‘de minimis’.

Could my business be exempt from paying VAT on energy?

No business can be exempt from paying VAT on energy, but some can qualify to pay VAT at the reduced rate of 5%.

Which businesses qualify for reduced VAT on business energy?

Charities and non-profit companies qualify for the reduced VAT rate of 5%, even if they charge for some of their services. These activities are considered to be ‘non-business’ and will still qualify for the reduced rate.

As well as charities and non-profit companies, businesses which are used as a dwelling or residential accommodation also qualify for the reduced rate. This doesn’t apply to hospitals, prisons or similar institutions, but does include:

  • Children’s homes

  • Homes providing care for –

    • The elderly or disabled

    • People with a past or present dependence on alcohol or drugs

    • People with a past or present mental disorder

  • Hospices

  • Institutions that are the main residence of at least 90 per cent of their residents

  • Monasteries, nunneries and similar religious communities

  • School and university residential accommodation for students or pupils

  • Self-catering holiday accommodation.

‘Mixed Use’ premises

‘Mixed use’ refers to businesses that use their premises for a variety of purposes.

You’ll qualify for the 5% business VAT rate if the majority of your energy usage (at least 60%) is for dwelling or residential accommodation . You can see examples of these businesses in the above section.

Charities and non-profit companies qualify for the reduced VAT rate of 5%, even if they charge for some of their services. These activities are considered to be ‘non-business’ and will still qualify for the reduced rate.

Otherwise you’ll pay the 5% rate on the proportion of your business that’s used for dwelling or residential accommodation. You’ll then pay the full 20% VAT rate on the proportion of energy which doesn’t qualify.

For example, if 50% of your business premises is used as a care home and 50% for administration or 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 like these are often exempt from other charges. For example, you might be exempt from the Climate Change Levy, which could reduce your energy bills by approximately 20%.

How does the Climate Change Levy affect VAT?

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. So if you qualify for the discounted rate of VAT, you may not have to pay the Climate Change Levy.

For businesses that don’t 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 business’s energy efficiency. So, not only do you lessen your impact on the environment by lowering emissions, you decrease your consumption and lower your outgoings.

‘De minimis’ business energy VAT rate

Domestic energy usage is below a set level. This has become known as the ‘de minimis’ level.

If a customer uses less electricity and gas than the de minimis level, then the energy will only attract the 5% rate of VAT. That’s regardless of whether the premises is used for business or domestic purposes.

This will normally include home offices and people who work from home, but as long as your average daily use is below 33kWh of electricity and 145kWh of gas, it includes your business. It’s measured on a monthly basis. Basically, every month you must use less than 1000kWh of electricity and 4397kWh of gas.

Can I apply for reduced VAT on business energy?

If your business qualifies for the reduced 5% VAT rate through the list of exemptions, you’ll have to fill out a VAT declaration certificate for both your gas and your electricity supplier. Each supplier will normally have their version available on their website.

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.

If your business qualifies through 'de minimis' then the 5% rate will automatically be applied to your bill.


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