Electricity and Gas Bills - Understanding VAT

Understanding VAT on your Electricity and Gas Bills

For all business users, it is important to understand the factors that affect the VAT you pay on your gas and electricity. The current rate of VAT is set at 20 per cent, and this will be the level that is paid by the majority of businesses. However, some organisations are eligible to pay a lower level of VAT, and it is important that you are aware of your obligations, as well as your entitlements, in order to ensure that you are paying the right amount.

As well as your VAT rate, you should also ensure you are getting a competitive price from your energy supplier. You can compare quotes for business electricity and business gas at Simply Business today.

What is VAT?

VAT stands for Value Added Tax and it is a form of consumption tax on goods and services.

Why does my business have to pay VAT?

Even if you are VAT registered you will still be required to pay VAT on certain goods and services, such as electricity and gas. However, if you are VAT registered and you pay more VAT than you charge your customers, then you will be able reclaim the difference from HMRC.

Should my business be VAT registered?

You must register your company for VAT with HMRC if your VAT taxable turnover is more than £81,000 a year, but you can also register voluntarily if your turnover is below this amount. You must then complete a VAT tax return to HMRC every quarter, which details how much VAT you have charged, and how much you have paid. If you have charged more than you have paid, then you will be required to pay the shortfall, but if you have paid more than you have charged, then HMRC will refund you the difference. 

You can find out more about when to register for VAT and how to charge VAT on the Government website.

How much VAT should I be paying on my gas and electricity bills?

Although VAT is normally chargeable at 20 per cent, you may be eligible to pay VAT at a reduced rate if you satisfy certain criteria:

  • De minimis - low energy consumption

Your will qualify for a reduced VAT rate of 5 per cent if:

If your business electricity demand is below, on average, 33kWh per day or 1,000 kWh per month.

OR

If your business gas consumption is below an average of 145kWh (5 therms) per day or 4,397 kWh (150 therms) per month.

The assessment of your consumption can be made by you or by your supplier, as a meter reading or as an estimate.

  • Charitable Organisations

Just about every charitable organisation, whether registered or not, is eligible to pay their VAT on business gas and electricity at the reduced rate of 5 per cent. They can also be exempt from the Climate Change Levy (CCL) which can help to knock off around 20 per cent off their overall energy cost.

 Research shows that almost half of charitable organisations are not aware that they could have their VAT reduced. If you have been overpaying on VAT, you can claim a rebate of the overpayment for up to four years. This could mean a cash injection of several thousand pounds for your charity.

 3.Other Exemptions

There are a number of other exceptions to the 20 per cent rate of VAT. These include:

  • Where the majority of the energy is used in a domestic setting
  • Where the business is a home, hospice, rehabilitation residence or place of care for children, addicts, members of the armed forces, students or the elderly
  • Where the business is a nunnery, monastery or other religious building
  • Where the business is a self-catering holiday accommodation, house boat, caravan or where it is a primary residence for over 90 per cent of the people living there
  • Where at least 60 per cent of the energy used supplies a premises meeting these criteria

What about the Climate Change Levy?

The Climate Change Levy (CCL) is a tax which was introduced in 2001 which was designed to encourage energy efficiency in businesses, the public sector and agriculture. The current rates are at 0.524p per kWh for electricity and 0.182p per kWh for gas. If you qualify for a reduced rate of VAT on your business electricity and gas, you probably qualify for exemption from the CCL as well. To find out more, read our guides:

Climate Change Levy Rates and Usages (Business Electricity)

Climate Change Levy Rates and Usages (Business Gas)

I’m eligible for VAT at a reduced rate, how do I register this?

To secure a lower rate of VAT, you will need to fill in a VAT declaration form to start the process. Contact us for a form for your current supplier.

There have been some recent changes in my company, will this affect the amount of VAT I pay?

There are certain circumstances where we have found customers to be paying the wrong rate of VAT, even if they applied for exemption in the past. These include:

  • When you have moved business premises
  • When you have switched supplier
  • When your organisation or business name has been changed
  • When the legal status of your business has changed, e.g. from a commercial enterprise to a charitable organisation

I’m not sure if I’m eligible for VAT at a reduced rate, what should I do?

If you’d like some help determining your VAT chargeability, please get in touch and we can work through your energy requirements together. We can also help you to claim a rebate on your VAT if you find that you’ve been overpaying. Further information regarding VAT is available from HMRC or via the HMRC National Advice Centre on 0845 010 9000.

If you’d like to get a new quote for your energy supply, please visit our  business electricity and business gas comparison pages to make sure you’re getting the best deal. 

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