VAT guide for business energy

If you own a business in the UK, you’re likely paying higher VAT on your energy than domestic customers. But, while you can’t claim back VAT on gas and electricity, you might be eligible for a discount. 

Here’s what you need to know about VAT for business energy.

If you own a business in the UK, you’re likely paying higher VAT on your energy than domestic customers. But, while you can’t claim back VAT on gas and electricity, you might be eligible for a discount. 

Here’s what you need to know about VAT for business energy.

Sofia Hutson
From the Energy team
5
minute read
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Posted 12 NOVEMBER 2021

What is VAT on business energy? 

Value Added Tax (VAT) is a government charge on goods or services. It’s added to almost everything you buy, including your gas, electricity or heating oil. VAT is automatically added to your gas and electricity bills. And while domestic customers pay 5% VAT, most businesses are charged a higher rate of 20%. 

But depending on the type of business you run, and the amount of energy it uses, you could be eligible for the same 5% rate as domestic customers.

Is my business eligible for the discount VAT rate? 

Your business might be eligible for the lower, 5% VAT rate if: 

  • it’s a charity or non-profit organisation
  • you work from home, or use your home for self-catering accommodation, for example, and at least 60% of your energy consumption is for ‘domestic use’
  • your business has ‘low’ energy usage – under a certain amount called the ‘de minimis’ threshold

What is the de minimis threshold? 

If your business’s average energy consumption is lower than the de minimis threshold, you should only need to pay 5% VAT. To qualify, your average energy usage must be less than: 

  • Electricity – 33kWh per day, or 1,000WkWh per month
  • Gas – 145kWh per day, or 4397kWh per month
  • Heating oil – 2,300 litres

How do I apply for the lower VAT rate? 

If your business is eligible for the lower rate, you’ll need to contact your energy supplier and fill in a VAT Declaration Certificate. The lower rate should then be added automatically to your bill. 

If you’ve been paying the higher 20% but were eligible for the discount, you might be able to claim a partial refund on payments made over the last four years. 

To make a claim, you can use the declaration form from your energy supplier. If you have separate suppliers for your gas and electricity, or if you have switched suppliers in the last four years (or the period you’re claiming for), you’ll need to contact each supplier and fill out a separate declaration form for each one.

What is the Climate Change Levy? 

If your business pays the standard 20% VAT rate, then you’ll also be charged a Climate Change Levy. 

The Climate Change Levy (CCL) is an environmental tax on commercial energy use. It’s designed to encourage businesses to be more energy efficient and help reduce carbon emissions. Businesses that qualify for the lower 5% VAT rate are usually exempt from the CCL charge, as are charities. 

The CCL rate is calculated per kilowatt hour of usage and adjusted each tax year. The rates from 1 April 2021 are : 

  • Electricity – 0.00775 pence per kWh
  • Gas – 0.00465 pence per kWh
  • LPG – 0.02175 pence per kg
  • Other taxable commodities – 0.03640 pence per kg 

However, your business might be eligible for a discount if you sign a Climate Change Agreement (CCA), agreeing to make energy efficient improvements to reduce your carbon footprint.

If you’ve signed up to a CCA, discounts from 1 April 2021 are: 

  • Electricity – 92%
  • Gas – 83%
  • LPG – 77%
  • Other taxable commodities – 83% 

The CCL is paid directly to your energy supplier and will be listed separately along with VAT and other charges included on your energy bill. Once collected, your supplier will then pay the CCL to HM Revenue & Customs.

Top tips to improve the energy-efficiency of your business 

  • Invest in energy-efficient lighting – T5 fluorescent tubes and LED bulbs don’t come cheap, but the initial investment is worth it in the long run. T5s could save up to 45% in energy costs compared to older T8 tubes, while LEDs use 90% less energy than traditional light bulbs. 
  • Turn off computers when not in use – even in standby mode, they’re still consuming energy.
  • Turn the heating down – turning the thermostat down by just 1ºC could reduce your heating costs by up to 8%. 
  • Replace your old boiler – if your workplace boiler is more than 10 years old, replacing it with a modern condensing boiler could reduce your bills by 10-30%.
  • Maintain fridges and cool rooms – if your business relies heavily on refrigeration, regular maintenance could reduce refrigeration energy use by up to 10%.
  • Install a half-hourly meter – automatic readings are taken every 30 minutes and sent directly to your electricity supplier, so you’ll get more accurate bills and only pay for the energy you use. It can also help you monitor your energy usage more closely and identify areas that need to be improved. 

Learn more about energy-saving devices that could help reduce your business energy costs.

How else can I cut the cost of my business energy bills? 

Simply switching your business energy supplier could potentially shave hundreds off your energy costs each year.

Frequently asked questions

Do business energy quotes include VAT?

No. VAT isn’t included when you compare business gas or electricity quotes. This is because not all businesses will pay the full 20% rate.

Should my business be VAT registered?

If your business has a taxable turnover of more than £85,000 per year, it must be registered for VAT with HMRC. If your turnover is less than this, you can voluntarily register for VAT. It might be worth it, as you can claim some VAT back on things like your business broadband and phone, or fuel if you drive a car or van for business use.

Can I claim back VAT on business energy?

Unfortunately not. Even if your energy consumption is exclusively for business use, you can’t claim the VAT back on gas or electricity. You can only claim a partial refund if you’ve been paying 20% VAT while you were eligible for the lower 5% rate.

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