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%.
Paying a reduced 5% VAT on your business electricity and gas depends on what industry your business operates in and what's done on the premises.
Here we explain more about the VAT on business electricity and gas bills.
Should I pay VAT on business energy?
Value Added Tax (VAT) on energy covers all electricity and gas used for business purposes.
The cost is automatically added as VAT on energy bills for business. Because most businesses in the UK are subject to VAT on business electricity and gas bills at 20%, your supplier assumes that your business has to pay it too.
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You pay VAT at 20% on your business electricity and gas bills, unless:
- You qualify for a reduction
- Your premises qualify as ‘mixed use’
- Your business qualifies under what’s called ‘de minimis’
How do I find out my business energy VAT rates?
The simplest way to find out your business energy VAT rates is to check your latest commercial electricity and gas bills.
The main figure on your bill should show the amount you owe for the current billing period. This figure is inclusive of VAT. Just above that should be a slightly lower figure, which is the amount you owe, excluding VAT, and the amount of VAT you’re due to pay for that billing period should also be shown as a separate figure.
You can then use these figures to work out your business energy VAT rates – if it’s 20% of the total, you’re on the standard rate, if it’s 5% then you’re on the reduced rate.
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 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. But this doesn’t apply to hospitals, prisons or similar institutions.
It does include:
Homes providing care for the elderly or disabled, people with a past or present dependence on alcohol or drugs, or people with a past or present mental disorder.
Institutions that are the main residence of at least 90% 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 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.
Otherwise, you pay the 5% rate on the proportion of your business that’s used for dwelling or residential accommodation. You then pay the full 20% VAT rate on the proportion of energy which doesn’t qualify.
For example, let's say 50% of your business premises is used as a care home and 50% for administration or offices. You should get an energy VAT reduction only 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%.
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 need to fill out a VAT declaration certificate for both your electricity and gas supplier. Each supplier normally has their own version available on their website.
We’ve already looked at some of the criteria for businesses qualifying for a reduced rate – such as what industry your business operates in and what's done on your premises. And businesses with energy usage below what's known as the ‘de minimis’ level is also considered for the reduced 5% VAT rate.
If your business qualifies through 'de minimis' then the 5% rate should automatically be applied to your bill.
What is the ‘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 only attracts the 5% rate of VAT. That’s regardless of whether the premises is used for business or domestic purposes.
This normally includes 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. So, every month you must use less than 1000kWh of electricity and 4397kWh of gas.
How does the Climate Change Levy (CCL) 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 are committed to achieving the same levels of energy efficiency, there is a Climate Change Agreement (CCA). This agreement means you can 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.
Do business energy quotes include VAT and CCL?
No, business energy quotes are usually exclusive of VAT and CCL charges, simply because some businesses are exempt from VAT and have different CCL rates.
*Between February 2020 and February 2021, 10% of Confused business customers saved an average of £895 on their business energy bills.