Within this business energy comparison guide, we’ll look at how much VAT on energy bills businesses can expect to pay, as well as how a business can be sure they are not paying more than they need to.
What Is The VAT On Energy Bills?
First of all, just what is VAT?
VAT stands for value-added tax and refers to an added, government tax placed on goods and services bought by consumers here in the United Kingdom. In some other countries, the VAT is added as an extra payment. In the UK it is included in the cost of your new coat; a smart TV; and yes, energy bills too.
The rate of VAT is different for commercial energy bills, and domestic or household energy bills. The latter pays less than half the cost of business energy VAT. This tends to provide a pretty clear-cut division however there are a few exceptions, especially for small businesses, and micro businesses run from homes.
Every business will be charged energy bills or utility bills to cover the amount of electricity and gas they use. Let’s take a look at how much VAT on energy bills businesses can expect to pay, as well as how a business can be sure they are not paying more than they need to.
VAT On Energy Bills
VAT on energy bills is charged to all consumers, including individuals and businesses alike. Sure, some consumers and small businesses are eligible for a discounted rate of VAT on energy bills. Before this can happen, it will need to be agreed upon with the energy supplier.
The rate of VAT on energy bills is determined by the amount of energy the consumer uses. This means that domestic customers or businesses who use a lot of energy will pay a much higher rate of VAT than those who use less energy.
Energy bills are expensive, for domestic and business use. Sure, you can cut back and reduce your output a little here and there, but ultimately you need electricity and gas to run a business. Business Energy Comparison can help you compare quotes from across the energy market. We can also help find the best provider for you and your business energy requirements.
What Is The VAT On Energy Bills?
The flat rate for VAT on energy bills in the United Kingdom is:
- 20% for businesses.
- 5% for domestic customers.
Of course, since the VAT rate is determined as a percentage of each customer’s energy usage, there is no one-size-fits-all model.
Whether you are running a household or a business, the amount of VAT you pay on your energy bills will be determined by figuring out a percentage of your overall energy usage. This tends to keep things fair and it also encourages customers to think about ways they can improve their energy efficiency.
Think about it: if you need to pay VAT on every smidgen of energy you use, of course, you are going to be looking for easy ways to reduce your energy consumption and everyday hacks to be a little more efficient.
Business energy refers to any energy, gas or electric, used for business purposes. This includes working on business premises or working from home.
Energy suppliers charge more for business energy as they assume that most businesses will use more than 33 electricity units or 145kWh of gas per day. If this is proven correct, then the business energy VAT rates for said business will remain at 20%.
Alternatively, if the business in question uses less energy, they might be eligible to pay VAT of just 5% since their business energy consumption is more akin to domestic use.
A business can apply to pay VAT at a reduced rate if they meet any of these criteria:
- The energy meter is primarily used for domestic energy usage.
- The energy meter records low usage (not all businesses will use the same amount).
- The meter is used for charitable non-business activities.
If your business meets one or more of these criteria you might be eligible to apply for a reduced rate of VAT but you will need to apply to your energy supplier to find out more.
The term de minimis refers to the second reduced rate criteria listed above. That is if your business energy consumption registers as low enough that you can get away with paying the 5% domestic use charge, as opposed to the 20% standard rate of VAT for businesses.
The de minimis level for electricity consumption is 33 kilowatt hours per day. For gas, the de minimis level is 145 kilowatt hours per day.
Hey, this is a good thing! If your business energy consumption is low enough to qualify as a de minimis user, then your VAT rate will be determined just by looking at your meter reading. In this scenario, you will not need to provide any supporting documentation. Easy, right?
A qualifying use business is one whose energy use is for charitable or domestic purposes. In either one of these scenarios, a business should merrily qualify for the 5% reduced rate of VAT on gas and electricity bills.
- Domestic purposes: this means that the meter must also be powering a residential property or complex. For example, if the business is located within a residential building or unit. It will usually require at least 60% of energy consumption to be domestic.
- Charitable or non-business use: your business must be a charitable or non-profit organisation or the meter must also supply a charitable property or site where non-business, charitable activities take place.
Determining qualifying use is not straightforward. If you have reason to think you might be eligible, contact your energy supplier.
VAT On Electricity Bills
The flat rate for VAT on business electricity bills is 20% of your usage. Straight away, this should encourage most businesses to try to be a little more energy efficient since 20% of less energy use is going to be a lot less painful than 20% of high energy use, right?
On top of that, the UK government offers a reduced rate of 5% VAT for businesses that use a minimal amount of energy: the de minimis amount. To meet this amount, a business will need to keep electricity consumption under less than 33kWh per day; 1000kWh per month; and 12,000kWh per year.
Electricity is a basic expense and one which very few businesses can manage without. Depending on your business it might be the one expense you really can’t reduce at all. All the more reason to make sure you are only paying the VAT you need to and you are working with the right energy provider for you.
Get the best deal on electricity with a little help from Business Energy Comparison.
VAT On Gas
The VAT rate for gas follows the same rules as electricity. The flat, expected rate for businesses is 20% of their gas consumption. However, if the business can keep its gas use beneath the de minimis amount, it will only be charged a 5% VAT rate instead.
To meet the requirements for this reduced rate, business gas consumption will need to be less than 145kWh gas per day. Over the course of a month, this equates to 4,397kWh of gas; and for a whole year, it is 52,764kWh.
Even if you manage to cut your gas consumption and keep below that reduced rate, you could still be spending more money than you need to if you are working with the wrong provider. Compare business gas prices from across the market and find the best deal today.
Where To Find Business VAT Rates
To find out your current business VAT rate, just take a look at your more recent utility bill. The VAT rate and amount you have paid should be right there, under the total amount owed.
Reduced VAT Rate For Business Energy
Every business will need to pay VAT on their electricity and gas usage, but that is no reason to pay more VAT than you are legally obliged to. If you think your business might meet the criteria for the reduced rate, then this will cut your VAT cost by 75% which is a substantial discount.
A business is eligible to pay the reduced rate of 5% energy VAT if more than 60% of the energy is used for domestic reasons, the business is a charity or non-profit (or shares charitable accommodation) or if energy consumption is kept sufficiently low.
How to apply for a reduced rate
If you use a small enough amount of energy to qualify for the reduced rate, then your chargeable VAT should be altered accordingly. If it is not, then contact your energy supplier.
If you find out that you have been paying the full, 20% rate when you should have been paying the reduced VAT rate, then you can apply for a refund or partial refund, and possibly glean back some of the excess money spent over the past four years.
The VAT rate for micro businesses
As the name would suggest, a microbusiness is simply a business which operates on a greatly reduced scale. The VAT rate for energy bills is determined by the amount of energy a business uses, as opposed to the size of the business.
It is most likely that a micro business will use sufficiently low energy to keep below the de minimis threshold but if not, they too will be charged the standard 20% VAT rate. Similarly, if your small business is run from home, then you will be charged the 5% domestic rate unless your energy usage goes above the de minimis threshold we discussed earlier.
Climate Change Levy
The climate change levy is an additional tax chargeable to certain types of businesses: most businesses in the industrial and agricultural sectors and similar, with above-average gas and electricity consumption.
The climate change levy (CLL) is a variable rate determined by the government every year to encourage energy efficiency within high-energy sectors.
A business can apply for a reduced CLL rate if they register as an energy-intensive business and opt to enter into a climate change agreement with the Environmental Agency, promising to make any reasonable changes possible to reduce its energy use and emissions.
Every business will be required to pay VAT on gas and electricity, it’s just one of those business expenses you can’t avoid! The flat rate for business energy VAT is 20% however some might be eligible to pay the 5% reduced rate instead, which cuts the VAT cost down by more than half.
In a bid to promote energy efficiency, the government offer this rate to businesses that can keep to a low energy usage level. Considering rising energy bills and ever-steep energy prices, saving a little extra on VAT is a good opportunity for any business that can improve its efficiency.
The cost of gas and electricity might not be going in the right direction but with a quote from Business Energy Comparison, you can ensure you are getting the best deal out there to help your business save money on energy prices and the cost of VAT.
Frequently Asked Questions
Do business energy quotes include VAT?
No. When you apply for a business energy quote, it will not factor in VAT. This is simply because some businesses will pay the standard, 20% rate, whereas others will qualify for the 5% reduced rate. Since the company providing the quote has no way of knowing which business will pay which, they cannot realistically estimate your VAT.
Is electricity 5% or 20% VAT?
It can be either, depending on the business. The standard VAT rate for a business is 20% however if the business has earned charitable status, or managed to keep consumption beneath the de minimis threshold, then said business can expect to be charged the 5% reduced rate.
Can VAT claims be backdated?
If you have reason to suspect you might have been paying a higher VAT rate than you perhaps should have been, you can claim for up to four years worth of VAT payments and possibly get back the excess money you have paid out.
Business Energy Comparison
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