Business energy VAT
VAT for business gas and electricity
Businesses have to pay VAT on their energy costs – find out if you might be eligible for a discount
What is VAT?
VAT, or value-added tax, is a government levy on goods or services which is added to the price of nearly everything you can buy. This includes sales and purchases of consumer items, as well as assets, financial advice, commission, rentals and utilities.
Does my business have to pay VAT?
If your business’s taxable annual income is above £85,000 then you need to register to charge VAT on the goods or services you sell, though you can volunteer to pay VAT if your turnover is less.
Should your business be VAT-registered?
If your business has an annual turnover of more than £85,000, then you are legally obliged to be VAT registered.
This must be done within 30 days of going over the threshold, via the government website.
When you register you will be sent a VAT certificate and details on when you need to submit a VAT return.
You can also register for VAT if you have a lower turnover than £85,000. Doing so means you can charge VAT on invoices and then claim it back on services, such as gas and electricity.
Claiming back VAT isn’t always possible, however, so you’ll need to consider the pros and cons if you have a small business and want to keep costs and admin down.
Does my business have to pay VAT on energy?
Gas and electricity tariffs for businesses automatically have VAT added to them. This will be at the 20% rate unless you're eligible for the reduced rate of 5%.
How much VAT do I pay on business energy?
Most businesses pay a rate of 20% on VAT for energy costs which is automatically added to your bill by your supplier. However you might be eligible for a 5% discounted rate depending on the type of business you own and the way you use energy.
Can I claim back VAT paid on energy bills?
If your business is VAT registered, you should be eligible to recover the VAT in full on your business expenses, subject to the normal rules on VAT deduction. This includes VAT on energy costs whether you're paying the normal 20% rate or reduced 5% rate.
You can apply for the reduced rate of 5% VAT if any of the following apply to your business:
● 60% of your office is used as a residential space. This is helpful if you work from home and have a small business
● You run a non-profit or charitable enterprise
● You operate self-catering housing for holidays
● Use less than 1,000kWh per month of electricity, or 4,397kWh per month of gas
You may find you qualify partially for the discounted rate, and need to pay the higher rate in some cases. It’s best to speak directly with suppliers to tailor a solution for your business.
To check how much tax your business can claim back, check the HMRC website.
How do I get a discount rate for VAT on business energy?
Your business might qualify for a 5% discount on business energy VAT if:
- It is a charitable or non-profit organisation: You might even be able to claim back overpayment rebates for the previous four years if you didn’t know you were eligible for the discount and as a result you were overpaying
- You use at least 60% of your energy for ‘domestic purposes’: For example if your business is also used for residential purposes, such as a care home or self-catering holiday accommodation. The 5% discount applies to the whole bill if you use 60% or more for domestic reasons, however if it’s less than 60% then only the proportion of energy used for domestic reasons is eligible
- You have a ‘low’ usage of energy: Low energy usage is usually defined as using less than 1,000kWh of electricity every month (33kWh a day), or 4,397kWh of gas (145kWh a day)
If you believe your business may qualify for a reduced VAT rate on business energy you must submit a VAT declaration form, which you can get from your supplier. You’ll also be able to claim back any overpayments from the last four years with the form.
You’ll have to submit a separate declaration form each for gas and electricity.
If you qualify for the discount on business energy VAT rates you might also be exempt from paying some, or all, of the climate change levy.
What is the climate change levy?
The climate change levy is a tax designed to promote energy efficiency and lower gas emissions for businesses. It only applies to units of electricity and gas you use, not to any other parts of your bill – for example, you won’t have to pay a levy on late payment fees or daily charges.
How does the climate change levy affect VAT on business energy?
If you qualify for a reduced rate on VAT and you meet the ‘low’ usage requirements you won’t need to pay the climate change levy.