VAT on energy costs

Guide to VAT on Business Energy Bills: How to Reduce Costs

VAT (Value Added Tax) is an essential part of the UK tax system. It applies to most goods and services, including energy. VAT rates vary for domestic and business energy use. Residential customers pay a reduced VAT rate of 5%, while businesses usually pay the standard 20%. However, businesses can reduce VAT costs in certain situations. This guide explains how VAT applies to business energy bills and offers strategies to lower expenses.

Domestic vs. Business VAT Rates

  1. Domestic Energy Bills: Residential customers pay a 5% VAT rate on their gas and electricity bills. This helps lower household costs.
  2. Business Energy Bills: Businesses face the standard 20% VAT rate. This can significantly increase operating costs, especially with rising energy prices.

Available VAT Reductions for Businesses

Most businesses pay the 20% VAT rate, but some exceptions can reduce the cost. Here’s how:

  1. Eligibility for the Reduced 5% VAT Rate:
    • Low Energy Usage: If your business uses less than 33 kWh of electricity per day or 145 kWh of gas per day, you may qualify.
    • Charities and Non-Profits: These organizations may qualify for the reduced VAT rate if 60% or more of their energy use is for non-business purposes, like in care homes or daycare centers.
  2. Climate Change Levy (CCL) Discount: The CCL is an additional tax that encourages energy efficiency. Businesses that qualify for the reduced VAT rate typically don’t pay the CCL. If your business doesn’t qualify for the reduced VAT rate, you can still reduce your CCL by entering a Climate Change Agreement (CCA) to make energy-efficient improvements.

If eligible, your supplier should automatically apply the reduced rate once you provide the necessary documents. If unsure, check with your energy supplier.

How to Apply for the Reduced VAT Rate

To apply for the reduced VAT rate, you need to:

  1. Submit a VAT Declaration Form: Contact your supplier to submit this form. Your supplier won’t apply the reduced rate until you inform them.
  2. Provide Proof: Charities or non-profits must provide documents like a Charity Commission registration number or HMRC letter.

Once your supplier receives your application, they’ll apply the 5% rate to your future bills.

Claiming Back Overpaid VAT

If you were charged the full 20% VAT rate when you should have been charged 5%, you can claim a refund. Here’s how:

  1. Check Your Bills: Review your invoices to find any overcharges.
  2. Know the Timeframe: You can claim overpaid VAT for up to four years.
  3. Fill Out the Form: Contact your supplier and request a VAT adjustment form. Provide details of the overpaid VAT.
  4. Submit the Form: Send the completed form back to your supplier to start the refund process.

Conclusion

Understanding VAT on business energy bills helps you manage costs. Most businesses pay 20% VAT, but businesses with low energy use or charitable status may qualify for the reduced 5% rate. Additionally, businesses can claim back overpaid VAT for up to four years.

Stay informed and apply for eligible reductions to save on energy costs. For tailored advice, consider consulting a tax professional or energy advisor.