VAT for business gas and electricity

Businesses are required to pay VAT on their gas and electricity costs. However, you may be eligible for a discount on your business energy prices. If your company meets the criteria, you could have the chance to reduce this VAT energy rate to just 5%.

What is VAT?

VAT (value-added tax) is a tax set out by government on products or services. This tax is applicable to almost everything you are able to purchase. VAT applies to sales and purchases of utilities, assets, financial advice, commission and consumer items. The standard rate of VAT increased to 20% on 4 January 2011, it was previously set at 17.5%.

Some organisations are even exempt from paying the full VAT and will pay a discounted rate. For example, charitable institutions or businesses that have a yearly turnover of less than £85,000 fall into this category.

Does my business need to pay VAT?

Businesses that have an annual taxable income of over £85,000 will need to register to charge VAT on the products or services they are selling. Even so, if your yearly turnover is lower than this amount, you can still volunteer to pay VAT.

If your business is required to register for VAT, you should do so with HMRC. Upon registration, you will be sent a VAT registration certificate.

Does my business have to pay VAT on energy?

Yes. Suppliers will automatically include VAT on their business electricity and gas tariffs. Even though these tariffs are technically considered as a business-to-business purchase, you will not be able to claim the tax back on your annual return. Furthermore, even though business energy is an essential service, VAT will still be applied to your bills.

How much VAT do I need to pay for business energy?

VAT for energy will be charged at a rate of 20% for most UK businesses. This tax is automatically added to your commercial energy bill by your provider. However, depending on the type of business you operate and the way you make use of energy, you may be eligible for a 5% discounted rate. More on that below.

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

Your business may be eligible for a 5% discount on business energy VAT for the following reasons:

Charitable or non-profit organisation

If your business is a charitable or non-profit organisation, you may be able to pay less VAT on your business energy. Additionally, it may even be possible to claim back rebates for overpayments made over the previous four years if you were not aware that you were eligible for this discount and you ended up overpaying.

At least 60% of your energy is used for domestic purposes

You could get the 5% VAT discount on business energy if your company is also used for residential purposes. For example, you may be running a care home or self-catering holiday accommodation. If you use more than 60% of energy for domestic purposes, the 5% discount will be applicable to your total energy bill. However, if the proportion for domestic energy use is less than 60%, then the discount only applies to that amount. So make sure you calculate your domestic and business usage separately and record this information.

Low energy usage

Typically, low energy usage accounts for using less than 1,000kWh of electricity every month (33kWh a day), or 4,397kWh of gas each month (145kWh a day).

If you believe that your firm qualifies for a reduced VAT rate on business energy, you should contact your supplier as soon as possible and submit a VAT declaration form. If you have made any overpayments over the past four years, you will be able to reclaim the amount you’ve overpaid by. You will need to submit a separate VAT declaration form for each type of fuel (gas and electricity).

Companies that qualify for a discount on business energy VAT rates may also be exempt from paying all or part of the Climate Change Levy. You can learn more about this in our Climate Change Levy guide for businesses.

How can I reduce my business energy VAT?

To cut down on the amount of VAT you pay for business energy, you will want to become more energy efficiency. Installing solar panels on your premises can help you generate your own electricity, and these are far more environmentally friendly. It is also highly recommended that you conduct a business energy audit, as this will help you identify how to improve your business’ overall power efficiency through your findings. Making the necessary changes doesn’t have to be expensive either, even simple things like switching to LED light bulbs and asking employees to turn off their computers at the end of the work day can make a noticeable impact.

We hope this guide has given you a clearer understanding on business energy VAT. If you have been overpaying, please do remember to reclaim any extra money paid to your supplier.