A guide to VAT on gas and electricity for business

If you run your own business it's a necessity to pay VAT on your energy costs. What isn't necessary is paying over the odds based on your consumption.

It's important to know whether you might be eligible for lower VAT on both business electricity and gas usage, and it's easy to find out.

What is VAT?

VAT (value-added tax) is the government tax that is added to the overall cost when buying or selling goods or services.

The standard rate in the UK for VAT is 20%, with the majority of purchases subject to this rate. However, there are other VAT rates to be aware of where you will be charged at a reduced rate of 5%. This rate applies to certain services, including energy.

Does my business need to be VAT registered?

Once your business reaches a taxable turnover of more than £85,000, or you're aware it is on track to exceed that amount for the year, you will need to become VAT registered. Even if you're business is VAT registered, you will still need to pay VAT on energy costs.

Does my business have to pay VAT on energy?

Gas and electricity tariffs will have the standard 20% VAT added to the total cost for most businesses. Some will be eligible for a discount, however this will need to be applied for separately.

How do I get a discount rate for VAT on business energy?

There are several reasons your business may qualify for a reduction in VAT to 5%. These include:

If you are a charity or not-for-profit organisation: You can also check whether you are able to claim back any overpaid tax from the last four years if you were unaware about the tax reduction.

If you are using at least 60% of energy for non-commercial use: You will be subject to VAT at 5% if your business uses energy for a 'qualifying use' such as when used for non-business reasons in a residential building: i.e. a care home or student accommodation. Note that if you're using less than 60% fuel for non-business use then VAT at the reduced rate will be charged pro rata.

Low energy usage: Low energy usage is considered no more than 1,000kWh of electricity per month (33kWh per day) or 145KwH or 150 therms of business gas (145kWh / 5 therms per day).

To apply for the discount you'll need to send a VAT certificate to your energy supplier to claim the discount. You'll need to provide a separate form for electricity and gas for each qualifying property.

If you qualify for a discounted rate of VAT on business energy it is also highly likely that you won't need to pay all, or some, of the Climate Change Levy.

What is the Climate Change Levy?

The Climate Change Levy is an energy tax alongside VAT that is applied to business users in the UK, and is chargeable on both electricity and gas supplies. The reason for this tax is to increase energy efficiency and reduce carbon emissions.

Once you've applied for your reduction and been approved, check with your supplier that any exclusions and reductions have been applied to your energy bill.

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