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VAT is an unavoidable part of running a business. There are three possible tax rates, and it’s important to know which one your business is eligible for. Most businesses have to pay 20% VAT on business electricity and business gas, but, like everything in business, it is not quite that simple.
We’re here to explain everything you need to know about backdating your VAT claim, applying for reduced VAT, and finding cheaper business energy deals.
VAT stands for the value-added tax. The government adds VAT to services and goods that are bought for consumption and use.
There are three VAT rates. 20% is the standard rate of VAT for most goods and services. Some products and services (such as children’s car seats, domestic energy, residential renovations, and more) are eligible for a reduced rate of 5%. 0% VAT is only available for things like children’s clothes, food, and newspapers.
VAT is charged at 5% on electricity in domestic settings such as houses, caravans, and houseboats.
The standard VAT on business electricity is 20%. Fortunately, some businesses are eligible for reduced VAT rates.
The standard VAT on business gas is 20%. Some businesses are eligible for reduced VAT rates, depending on certain criteria.
For domestic settings, VAT is charged at 5% on gas for houses, caravans, and houseboats.
Businesses that have an annual turnover of over £85,000 are required by law to register for VAT. From the 1st of April, 2024, the threshold will increase to £90,000.
When you successfully register for VAT, HMRC will send you a VAT Registration certificate that includes:
Once registered, you can add VAT to your invoices and reclaim any VAT on items for your business. If you are not VAT registered, you still have to pay the VAT on any purchases, but you can’t reclaim it.
If your business is VAT registered, you should take advantage and claim back the VAT on your electricity and gas. Whether you work at an established business premises or run your business from home, you can still apply.
Even if your business is not eligible for VAT, you can still try to claim back the VAT on items for your business. This includes VAT on electricity and gas.
Juggling all the aspects of running a business can be difficult, so it’s no surprise that business owners forget to reclaim their VAT. The good news is that you can backdate your VAT claim.
Businesses have up to four years to claim back any VAT. It’s a common misconception that the time limit starts on the date of your supplier’s VAT invoice. The timer starts from the due date of the VAT return on which you should have made the original claim.
The Climate Change Levy (CCL) is a tax on gas and electricity for businesses, agriculture, and organisations in the public sector. The government introduced this levy in an attempt to make UK businesses more environmentally friendly.
The CCL encourages commercial energy consumers to step away from carbon emissions and consider more sustainable energy sources.
Luckily, some businesses are exempt from paying the full amount of CCL. Businesses are eligible for a discount if their usage is under the de minimis value for VAT on electricity and gas.
The de minimis rule is a threshold set by HMRC that determines whether a commercial energy consumer will be charged 5%, 10%, or 20% VAT on electricity.
If your business’s consumption is below the de minimis level, it is automatically classed as domestic use and will be charged at 5%.
5% is the golden amount for business owners who want to reduce their expenses, but which businesses are eligible?
You are eligible for 5% VAT on electricity or gas if:
Your business falls below the de minimis rule if:
If your business meets any of these requirements, you can apply for reduced VAT on electricity and gas.
Charities and non-profit businesses are eligible for a 5% VAT rate on their business energy, known as the charitable VAT exemption. Businesses that meet these criteria include:
| Business Size | Business Electricity Unit Rate +20% VAT(p per kWh) | Business Electricity Unit Rate +5% VAT (p per kWh) | Unit Rate Saving for Non-Profits (p per kWh) |
|---|---|---|---|
| Micro business (0 - 5,000kWh) |
30.2p | 25.2p | 5.0p |
| Small business (5,000 - 15,000kWh) |
32.4p | 27.0p | 5.4p |
| Medium business (15,000 - 25,000kWh) |
32.4p | 27.0p | 5.4p |
| Large business (25,000 - 50,000kWh) |
32.9p | 27.4p | 5.5p |
| Very large business (50,000 - 100,000kWh) |
32.5p | 27.1p | 5.4p |
Standing charge and CCL omitted for simplicity. UK-wide average price of our panel of suppliers. Prices are for a 2-year contract commencing on September 1, 2024 with annual usage based on the mid point of each usage band.
Businesses that meet the eligibility criteria for 5% VAT and CCL exemption need to fill out a VAT declaration form from their energy suppliers or from HMRC.
You need to complete multiple declaration forms if any of these factors apply to your business:
From there, your energy suppliers will review the application and apply the new VAT and CCL rate to your bills within 14 days, while HMRC should repay you within 30 days of receiving the return.
If your business has a mix of activities that meet the government’s eligibility criteria, then you need to estimate the percentage split between qualifying use and non-qualifying use for each individual energy meter.
How you measure the mix of eligible energy needs to be fair and reasonable, including:
Your percentage split needs to be as specific as possible, or else your energy supplier will return it to you for clarification. Your split also dictates whether you receive full or partial CCL exemption. The table below illustrates how this is decided:
| Mix of eligible energy | 5% VAT | CCL |
|---|---|---|
| 60%+ eligible | Eligible energy charged reduced rate. Non-eligible energy charged at normal business rate. |
Whole supply excluded from CCL. |
| 1 - 59% eligible | Eligible energy charged reduced rate. Non-eligible energy charged at normal business rate. |
Reduced VAT portion excluded from CCL. Non-eligible energy charged at normal CCL rate. |
In the case where different energy meters have different percentages of qualifying use, then each meter is assessed separately. The qualifying portion of each meter is charged the reduced VAT and CCL.
For energy usage that qualifies for the lower VAT rate, you can save hundreds - even thousands - of pounds. The table below shows the difference the lower VAT rate will have on your annual business electricity bill.
|
Business Size |
Annual Business Electricity Cost with 20% VAT |
Annual Business Electricity Cost with 5% VAT |
Annual Saving for Non-Profits |
|---|---|---|---|
|
Micro business |
£1,118.93 |
£979.07 |
£139.87 |
|
Small business |
£3,415.87 |
£2,988.88 |
£426.98 |
|
Medium business |
£6,506.21 |
£5,692.93 |
£813.28 |
|
Large business |
£12,140.07 |
£10,622.56 |
£1,517.51 |
|
Very large business |
£23,628.24 |
£20,674.71 |
£2,953.53 |
Annual business electricity costs excludes CCL, and prices are pulled from our panel of suppliers. Prices are calculated based on an annual usage of the midpoint of each band and are for two-year contracts beginning on September 1, 2024 and are an average of UK prices.
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Even if your business is not eligible for reduced CCL payments, you can still make savings by signing up for the Climate Change Agreement (CCA). When you sign, you agree to make changes to improve your energy efficiency, reduce consumption, and fight climate change.
Businesses that sign the CCA are eligible for discounts of up to 90%, although very few businesses achieve this amount.
Regardless of how much you pay for VAT on electricity, you can reduce your expenses by switching to a new supplier. Switching suppliers is the easiest, quickest way to make a lump sum on your business energy bills.
Our intelligent algorithm matches you with personalised, relevant deals that suit your business needs. Just input a few details, wait for a few minutes, and browse through a list of suitable suppliers.