Energy VAT guide for businesses

Running costs are hitting businesses harder with the current state of trading and utilities markets. One area worth consideration to address this is business energy VAT.

Are you eligible for the reduced rate? Could your business claim VAT back? In the following article, we’ll cover everything you need to know about business energy VAT.

What is VAT?

VAT (Value-Added Tax) is a government set consumption tax on goods and services. The standard UK VAT rate is 20% but this may be reduced in some circumstances for businesses.

Any business with an annual turnover of more than £85,000 (current VAT threshold 21/22), must register for VAT and complete a VAT return.

Can my business claim VAT back?

VAT registered businesses charge customers VAT on products or services sold, but also pay VAT themselves on products such as materials or stock.

Businesses registered for VAT (except those flat rate registered making sub £2,000 non-capital purchases) can claim the VAT spent on expenses back. If the business VAT expenditure is higher than the amount charged to customers, HMRC will refund the difference.

How much VAT does my business pay on gas and electricity?

VAT is payable on all energy usage regardless of whether it is commercial or domestic. Therefore, you will pay VAT on the gas and electricity you use for work purposes. Even though this is a business-to-business transaction, you cannot claim VAT back.

The standard rate is 20% but your business may be eligible for a discount (which you must apply for). To find out how much VAT you currently pay on gas and electricity, simply look at a recent energy bill for your business. The rate should be displayed in the balance owed section.

Is my business eligible for a VAT reduction on energy?

Your business should be eligible for the reduced VAT energy rate of 5%, if usage falls within the following parameters:

• Average gas usage is less than 145kWh per day.
• Average electricity usage is less than 33kWh per day.

Your business may also be eligible for the reduced rate if it meets the following requirements:

• At least 60% of the business’ energy usage is for dwelling or residential accommodation.
• The business is charitable or a non-profit organisation.

If your business has been charged 20% VAT on energy whilst eligible for the reduced rate, you may be able to claim a partial refund on any overpayments made in the last four years.

Contact your supplier and complete a Declaration Form to start a claim. If you have several sites or suppliers, or have switched suppliers during the last four years, multiple declaration forms are required.

How to apply for VAT reduced rate on business energy

Request a VAT Declaration Form from your supplier to register for a reduced rate and claim any rebates for historic overpayments.

Businesses accepted onto the reduced rate may also be automatically exempt from paying certain government levies such as the Climate Change Levy.

What is the Climate Change Levy?

If you are approved for the reduced energy VAT rate, you may also be exempt from paying the Climate Change Levy (CCL), an environmental tax introduced in 2001.

CCL was brought in to encourage businesses to enhance their energy efficiency and reduce carbon emissions. The rate from 1 April 2022 is 0.775p per kWh for electricity and 0.568p per kWh for gas.

There are two rates within the CCL:

  • Main Levy Rate – businesses who pay the standard 20% VAT rate will also be charged CCL.
  • Carbon Price Support Rate – applies to businesses which own electricity generating stations or operate heat and power stations. It’s unlikely businesses are required to pay this as generating their own energy would class them as a small generator.

If your business is not exempt, you can sign a Climate Change Agreement (CCA) whereby you may be granted access to up to 90% discount. To be eligible, you will need to improve your business’ energy efficiency and reduce average energy consumption.

Our team of experts can analyse your current expenditure and highlight any areas of concern within your billing. If you have concerns or questions about your business energy, get in touch today.

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Paul JohnsonGroup Financial Director

About Paul

Paul Johnson is very much a home-grown talent.

He joined Great Annual Savings Group in its infancy, fresh from a youth career as a professional footballer with Hartlepool United.  He quickly established a reputation within the business and aced all required accountancy qualifications in the space of four years to become the Group’s Management Accountant.

Several successful projects later, Paul was promoted to Head of Finance.  When the former FD left GAS, he took on the mantle of the business’ most senior finance professional; boasting a string of incredible achievements all under the age of 30.