Business Energy VAT Declarations
With standard VAT charges on your business energy at 20%. Did you know that some businesses may be eligible for a reduced VAT rate depending on the type of business or the amount they use? Why not take a look at our guide below and find out more?
What is Value Added Tax?
VAT stands for Value Added Tax. It is a government tax which is added to goods and services. In the UK the standard tax rate is variable depending on the goods and services you are purchasing.
For instance, there is a zero rate of VAT for most food and children’s clothes, meaning the VAT rate is 0%. There is a reduced rate of VAT for some goods and services, such as children’s car seats and home energy, meaning the VAT rate is 5%. Lastly, the standard rate of VAT applies to most goods and services, including business energy, meaning the VAT rate is 20%.
There are some exceptions to the 20% VAT rate on energy usage such as 5% where the meter is for domestic use and for charitable non-business use, which will be covered below.
Does my business energy have to be taxed?
All domestic and business owners must pay a tax on their business energy bills which is set at a rate of 20%, but there are some exceptions which might mean you’re eligible for a cheaper rate. We’ll look into who is eligible for a cheaper rate further on in this guide.
Understanding VAT on Business Energy?
Running a business can be tough, especially as we draw into the winter months, energy usage can skyrocket leaving already struggling businesses in a difficult position. This isn’t helped by the additional 20% VAT that is added to your business energy costs.
Can the VAT on business energy be lowered?
There are a few ways that businesses can lower their energy VAT. One of the current government initiatives is to offer a discounted 5% rate to businesses that use limited amounts of electricity. As the VAT is reduced on those using less energy, it allows for those businesses that qualify to significantly reduce their energy costs.
Reducing your energy levels means you can benefit from the 5% VAT rate, which is called “de minimis” meaning the minimum.
What is the “de minimis” VAT rate?
If you’re struggling to pay for your business energy bills, you might need to consider reducing your overall usage so you can benefit from the “de minimis” VAT rate. To qualify for the 5% VAT rate businesses must reduce their energy levels, which means they’ll need to use less than 33 kWh of electricity per day and 145 kWh of gas per day. Known as de minimis levels.
If your business is classed as a microbusiness or you run your business from your home you’ll qualify for the 5% VAT rate, so long as you don’t go over the de minimis threshold.
How else can a business qualify for reduced VAT rates?
As well as qualifying under the de minimis rate, there are also other possibilities for you to reduce your VAT rate. To qualify for a reduced VAT rate your business must meet the following criteria:
60% of energy used as domestic only – Let’s say you own a business that provides self-catering options for guests or you run a care home for the elderly. The 5% discount would apply if you use more than 60% or more for domestic reasons.
Not-for-profit organisation – Having a business that is either a charity or not-for-profit organisation means you will also qualify for the 5% VAT rate on business energy. If you didn’t know this before paying for energy bills, you might be able to claim back on overpayments for up to 4 years previously.
Schools or educational academies – Essentially falling into the same bracket as above, but applied specifically to schools and academies.
Where can I find out if my business is eligible for VAT reductions?
If you’re unsure whether your business would qualify to reduce business energy VAT costs, then you can take a look at the government website, below:
How much could you save with a reduced VAT rate?
Let’s take an example here so you can see just how big a difference 20% VAT and 5% VAT rates are.
Assuming an average annual energy bill was £100,000 + VAT, the change in VAT could represent a sizeable difference in the amount of VAT added to a business’s energy bills.
Current Standard VAT Rate: 20% = £20,000
Proposed VAT Rate: 5% = £5000
That change from 20% to 5% would save a business £15,000, taking their annual energy bills down from £120,000 a year to £105,000 a year
Steps to take to check if your business is eligible for a reduced energy VAT rate
- Determine your business’s annual energy consumption, gather your bills over the last year and calculate your total use.
- Verify if you fit within the de minimis threshold, this means that your electricity threshold is 33 kWh per day, 1000 kWh per month or 12,000 kWh per year. For your gas consumption, you should be using less than 5 therms per day, 150 therms per month or 4,397 therms per year.
- Check for any applicable exemptions, this includes business sectors like manufacturers or agriculture or your business has an annual turnover of less than £85,000.
Contact your energy supplier
- Inform your supplier about your eligibility to reduce tax rates, and provide them with energy consumption details as well as any applicable exemptions that you may have.
- Request a VAT declaration form.
- Complete and submit your VAT declaration form, and ensure you provide accurate information including business details and consumption data.
Monitor your energy bills
- Once the reduced rate is applied you should check your energy bills to ensure the reduced 5% VAT rate is reflected.
- Claim a rebate for overpayments, if you’ve overpaid your energy bills due to not having a reduced rate you’ll be able to claim a rebate from either your supplier or HMRC.
- It will typically take between 4-6 weeks for your VAT rate to change from 20% to 5%.
- Your rebate will take between 4-6 weeks to go through and may take slightly longer for you to receive payment on this.
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