Understanding VAT on Business Electricity Bills

VAT (Value Added Tax) on electricity bills is among the costs of business expenses which company owners must consider. In this blog post, we will break down what VAT is, whether your business needs to be VAT registered, how VAT applies to business gas and electricity, and whether you can reclaim VAT on your energy consumption.

What is VAT?

VAT is a consumption tax that is applied to most goods and services in the UK. It is collected at each stage of the supply chain, from production to the point of sale, with the final consumer ultimately bearing the cost. For businesses, VAT is charged on goods and services purchased and can also be reclaimed on VAT incurred for business-related purchases, subject to certain conditions.

The standard rate of VAT in the UK is currently 20%, although there are reduced rates and exemptions for specific goods and services. VAT-registered businesses are required to charge VAT on their taxable sales and pay this amount to HM Revenue & Customs (HMRC). They can then reclaim the VAT they have paid on eligible purchases and expenses, which helps to reduce the overall tax burden on the business.

Does my business need to be VAT registered?

Whether your business needs to be VAT registered depends on your annual turnover. As of the current threshold, if your business’s VAT-taxable turnover exceeds £90,000 in a 12-month period, you are required by law to register for VAT with HMRC. Once registered, your business must charge VAT on most goods and services it provides and submit regular VAT returns to HMRC.

If your turnover is below the £90,000 threshold, registration is voluntary. Some businesses choose to register even if they are below the threshold, as it allows them to reclaim VAT on business purchases. This can be particularly advantageous if your business has significant VAT-able expenses.

While voluntary registration may reduce costs through VAT recovery, it also imposes additional administrative duties, such as maintaining accurate records and filing VAT returns regularly.

Do I need to pay VAT on business energy bills?

VAT generally applies to business gas and electricity bills, but the rate can vary depending on your business's circumstances and energy consumption.

For most businesses, the standard rate of VAT on electricity and gas is 20%. This rate applies to the majority of business energy users who consume more than the de minimis limits. The de minimis limits are set at:

● 33 kWh of electricity per day (1,000 kWh per month)

● 145 kWh of gas per day (4,397 kWh per month)

If your business consumes less than these amounts, you may be eligible for the reduced VAT rate of 5%, which is typically applied to small businesses or those with low energy usage. This reduced rate can provide some relief on energy bills for businesses that fall under this threshold.

Additionally, certain businesses and organisations may qualify for the reduced rate of VAT on all their energy consumption. These include charities and non-profit organisations, as well as certain sectors such as residential care homes, which are considered eligible for the reduced rate regardless of their energy usage levels.

To benefit from the reduced rate, your business may need to provide a VAT declaration certificate to your energy supplier. It’s advisable to check your eligibility and ensure that your supplier has the correct information on file to apply the appropriate VAT rate to your bills.

Can I claim back VAT on business energy consumption?

If your business is VAT-registered, you are generally entitled to reclaim the VAT paid on your energy bills, provided that the energy is used for business purposes. This can be done through your VAT return, where you will account for the VAT charged on your energy bills as input tax. The amount of VAT you can reclaim will then be offset against the VAT you have charged your customers (output tax).

However, there are certain conditions and exceptions to be aware of:

● Mixed-use premises: if your business operates from premises that are also used for non-business purposes (for example, a home office), you can only reclaim the VAT on the portion of energy consumption that is directly attributable to business use. This requires you to calculate and apportion the energy usage between business and private consumption accurately.

● Partial exemption: if your business makes both VAT-exempt and VAT-taxable supplies, you may be partially exempt from reclaiming VAT on some of your expenses, including energy costs. This is because you can only reclaim VAT to the extent that the relevant costs relate to your taxable supplies. If your business falls into this category, you will need to calculate how much of your energy usage is attributable to your taxable activities and apply the corresponding VAT recovery rate.

● Special circumstances: certain sectors, such as financial services and health care, are subject to specific VAT rules that may affect your ability to reclaim VAT on energy and other expenses. It’s advisable to seek specialist advice if your business operates in these areas.

Reclaiming VAT on energy bills can be a straightforward process if your business is fully taxable and your energy is used solely for business purposes. However, if you have a more complex VAT situation, it’s worth consulting with a VAT specialist to ensure that you are reclaiming the correct amount and meeting all HMRC requirements.

What is the Climate Change Levy?

The Climate Change Levy (CCL) is a government-imposed tax aimed at encouraging businesses to reduce their energy consumption and minimise their carbon footprint. Introduced in 2001, the CCL applies to the energy used by businesses in the United Kingdom, including electricity, gas, and solid fuels. The levy is intended to promote energy efficiency and sustainability by making businesses more conscious of their energy usage. While it applies to most commercial energy consumption, certain sectors, such as charities and those engaged in energy-intensive activities, may benefit from exemptions or reduced rates.