Your business will have to pay VAT on your energy bills – but you might be entitled to a discount, bringing the rate down from 20% to 5%. Here, we look at what you need to know.
What is VAT?
It’s a tax on goods or services that is typically added to the cost of nearly everything you buy in the UK – usually at a rate of 20%.
Will my business charge VAT?
If your annual income amounts to more than £85,000 before tax, you must register to charge VAT on any goods or services you sell. However, if you wish, you can register to charge VAT if your income is less than £85,000.
Does my business pay VAT on energy usage?
Whether you are registered for VAT or not, gas and electricity charges for businesses will automatically come with this tax added to them – and you cannot claim this back.
There are plenty of business energy suppliers who can help clarify your particular circumstances. You can find a range of them at our business energy channel.
How much VAT do I pay on business energy?
The amount of VAT you pay on your bill is primarily driven by how much energy you use.
If you use more than 33 electricity units/145kWh of gas per day during the bill period, you will pay the standard rate of VAT at 20%. However, if you use below this threshold you will be charged VAT at the reduced rate of 5% – the same as you pay on your residential bill.
Susanna Salter, senior manager of small and medium business at EDF Energy, says: “Our system automatically calculates the rate of VAT for small business customers, taking into account how much the customer has used and whether we’ve had a VAT declaration from the customer qualifying them for a discount.”
“Many of our small business customers qualify for the lower rate VAT usage threshold which means they automatically pay the 5% reduced rate of VAT and CCL wouldn’t be charged (see below), similarly to a residential customer.”
Can I get a discount?
You may be eligible for the 5% VAT reduced rate if your usage is low. Otherwise, this depends on the type of business you own and how much energy you use.
You may also qualify for the discount under the following circumstances:
You run a non-business charitable or non-profit organisation. In this case, you may also be eligible for rebates for the previous four years’ worth of VAT payments on your energy bills, if you weren’t aware that you’re eligible for this discount.
At least 60% of your energy usage is for domestic purposes, such as residential – for example, holiday accommodation. In this case, you’ll receive the 5% rate of VAT on your entire bill. However, if the amount of your energy usage for domestic purposes is less than 60%, only this portion is eligible for the 5%.
How do I claim the discount?
If the amount of energy your business is using falls below the so-called “de minimis” threshold you don’t need to do anything as your supplier will automatically calculate this for you.
If you believe you’re entitled to a discount otherwise, ask your supplier for a VAT declaration form.
Once you complete this, and provided you’re eligible, you will qualify for a reduced VAT rate on your energy use. You can also use this form to claim back any overpayments from the last four years. You’ll need separate declaration forms for your gas and electricity supply discount.
Am I entitled to any other discounts?
If you’re entitled to a reduced rate of VAT on your business energy use, you may also be exempt from some, or all, of the Climate Change Levy (CCL).
What is the Climate Change Levy?
While considering VAT on energy bills, it’s also important to know about the Climate Change Levy (CCL). This is aimed at encouraging energy efficiency and lower gas emissions for businesses. It applies to all those operating within the industrial, commercial, agricultural, and public services sectors.
However, domestic energy users are exempt from the charge, as are charities who use energy for non-business use or business customers whose energy usage is low. There are also exemptions for power that won’t be used in the UK and certain forms of transport. Check with your particular supplier for more information.
How is the levy calculated?
The rate of CCL your business pays is calculated per kWh hour of usage. Your energy supplier will calculate it using the current rate, and this will be added to your bill. You’ll be able to see this listed as a separate line item on your statement. If you’re exempt from CCL, you’ll need to inform your supplier.
Rob Milloy, sales and service director at business energy supplier Opus Energy, part of Drax Group, says: “VAT and the CCL can add a considerable amount onto your energy bill, so it’s worth checking to see whether your business is eligible for a discount or exemption.
“Non-energy charges, which include the climate change levy, make up between 40-70% of electricity bills and 20-50% of gas bills, depending on business location and meter type.
“We’d advise speaking to your supplier upfront to understand how additional charges are accounted for in your contract, and whether you’re eligible for any exemptions or discounts.”