VAT For Business Gas and Electricity
VAT, also known as Value Added Tax in the European Union, is a broadly based consumption tax assessed on the value added to both goods and services. It applies to almost all goods and services bought and sold for consumption or use in the European Union.
The VAT rate on business electricity and gas bills is 20%. Still, to promote energy efficiency and help hit national targets, the government offers a discounted rate of 5% for businesses that use a limited amount of electricity and gas. If you are a business owner, you may be wondering what steps you can take to make sure you can take advantage of the discounted rate offered. Below we will talk about what constitutes these limited amounts and how to lock in this lower VAT rate for business gas and electricity.
Is VAT Required For Your Business?
If your business’s taxable turnover is higher than £85,000 per year, then you are required by law to register for VAT. It will automatically be added to your bill by your energy supplier regardless. A business with an annual turnover of less than this amount can voluntarily register for VAT. After you complete the process to register, HMRC will send you a VAT registration certificate.
You will have to pay VAT on business energy whether or not your business is VAT-registered. Luckily, your VAT can be lowered through limited use discounts. This means it can save you money by looking into more energy-efficient business practices.
Limited Use Discounts
To receive the discounted rate of 5% instead of the hefty 20%, you have to prove that you have low energy usage.
To meet these requirements, you must:
- Use less than 33kWh of electricity per day, or 1,000kWh per month.
- Use less than 145kWh of gas per day, or 4,397kWh per month.
If your usage is low enough to meet these standards, your supplier should automatically apply the VAT discount to your bill. Always check to make sure. If you find out that your business has been paying the standard rate of 20% even though it has been eligible for the reduced rate, you can request a partial refund on any overpayments made during the last four years. To request a refund, you will need to fill out a declaration form with your supplier.
Additional Discounts on VAT
Apart from limited energy or de minimus level use discounts, your business may be eligible to pay the reduced rate of 5% on business energy VAT if either of the below is true of your business:
- It is a charity or not-for-profit organization.
- You use at least 60% of your energy for domestic purposes. For example, if your business has a residential element like bed and breakfast. The 5% discount will apply to your whole bill for as long as you use 60% or more energy for domestic purposes.
If you qualify for any of the above discounts, it is essential to register to start getting your savings now.
VAT & Climate Change Levy
The Climate Change Levy (CCL) was introduced in 2001 by the government. It is an environmental tax that aims to encourage businesses to improve energy efficiency and reduce their carbon emissions. As of April 2020, this was at a rate of 0.811p per kWh for electricity and 0.406p per kWh for gas.
The CCL is a combination of two different rates. This includes:
- Main Levy Rate – if your business currently pays VAT at the 20% rate, it will also be charged the CCL.
- Carbon Price Support Rate – you will pay this rate if you own electricity generating stations or an operator of combined power and heat stations.
If your business is eligible for a discounted energy VAT rate, you may qualify for exemption from the introductory rates of the Climate Change Levy. If you are not exempt from the CCL, you can sign a Climate Change Agreement (CCA), which may give you a discount of up to 90% on these rates. By signing this agreement, you will need to improve your business’s energy efficiency and reduce your average energy consumption.
VAT for business gas and electricity may not be something you can avoid as a business owner. But, luckily, by monitoring your energy usage and implementing energy-efficient practices, you can drop that 20% rate down to 5% and see significant savings on your energy bill. A 15% drop is substantial savings. That is something all business owners would be happy to see.
You can read more about value-added tax on gas and electric bills here.
Other useful links about Business Energy
5 Products and Services Dual Energy Can Provide for Your Business
Switching to Scottish Power
What is a Fixed-Rate Business Tariff?
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