VAT on business electricity - Smarter Business

How to Save VAT on Business Electricity

VAT on business electricity is an unavoidable expense, but your business may qualify for discounts or reductions on your VAT on energy…

VAT on business electricity: The facts

  • All business energy is subject to VAT.
  • VAT on business energy accounts is normally in the region of 20%.
  • Unfortunately, you can’t claim this VAT back.
  • However, your business may be eligible for a VAT discount on your business energy.

Should your business register for VAT?

Does your business have a taxable turnover of over £85,000 per year? If so, you must register for VAT.

If your business has a taxable turnover of less than £85,000 per year, you can register for VAT voluntarily.

What happens when you register for VAT?

HMRC will send your business a VAT registration certificate with:

  • your VAT number
  • details on when to submit your first VAT return
  • details on when to submit your first VAT payment
  • your ‘effective date of registration’ (this is either the date when you asked to register, or the date that you went over the threshold)

Do you qualify to save VAT on business electricity?

Your business could be eligible for a reduced VAT rate of 5% on your energy bills if you meet one or more of the following criteria:

  • You use a minimum of 60% of your energy consumption for non-commercial purposes.
  • You are a non-profit or charitable organisation.
  • Supplies of certain small quantities of fuel and power, known as de minimis, are always treated as being made for domestic use, even when the supply is to a business customer:
    • You use less than 1,000kWh of electricity per month, or 33kWh per day
    • You use less than 4,397kWh of gas per month, or 145kWh per day
  • Your business may also qualify for a reduction of VAT on business electricity through the Climate Change Levy (CCL), a policy that encourages businesses to use energy efficiently and reduce carbon footprints.
  • Sign a Climate Change Agreement (CCA) to get a discount on the CCL tax. This is essentially a signed commitment to reducing your business’s emissions and energy consumption.

What is the impact of the CCL on business energy costs?

The Climate Change Levy applies to commercial and industrial energy supply for:

  • industry
  • agriculture
  • public administration
  • commerce
  • other services

The CCL applies to business energy sources, such as electricity, gas, and solid fuels.

Like VAT on business electricity, the levy doesn’t apply to charities, domestic consumers, and consumers who use only small amounts of energy. More information on the CCL can be found here.

As mentioned above, your business can pay a reduced CCL leavy rate if you sign a CCA with the Environment Agency. Energy-intensive businesses can also get a 90% reduced rate for electricity and a 65% reduced rate for other fuel types.

Why you could be paying too much VAT on business energy

Even if your business qualifies for a business energy VAT reduction, your supplier may not be applying it correctly – or at all! Reduced VAT should be incorporated into your energy bill by default. However, energy suppliers often neglect to do this.

Or, perhaps you have applied for an exemption previously, but your circumstances have changed.

For example:

  • You have moved business premises.
  • You’ve switched supplier.
  • Your organisation/business have changed its name or legal status.

How to ensure you are getting the correct VAT on business electricity

  • Check your energy bill regularly to ensure you are paying the correct rate.
  • Use the services of an energy consultant to ensure the accuracy of the tax associated with your bills.

Don’t qualify for any VAT discounts?

Even if your business doesn’t qualify for reduced VAT on business electricity, there are other ways to reduce your business energy bill. One of the easiest ways to save on your business energy bills is to switch energy suppliers. In an increasingly-competitive energy market in the UK, it pays to shop around.  

Read our Business Energy Saving Guide for simple solutions to help your business save money and use energy more efficiently.

More information about business VAT

For more information about business VAT and VAT on business energy and gas, visit the HMRC site.