Understanding Your Bill: Guide to VAT on Business Energy

Commercial, SME / / By

As a business owner, it’s important to understand the various taxes and fees that may be applicable to your energy bills. In this blog, we’ll be exploring the concept of VAT for business energy (VAT), including how it’s calculated, when it’s applicable, and how it can affect the overall cost of your business electricity and gas bills.

Whether you’re just starting out in business or you’re an experienced entrepreneur, this blog will provide valuable information on VAT and how it can impact your energy costs.

What is VAT?

Value-added tax (VAT) is a type of indirect tax that is levied on the sale of goods and services in many countries around the world, including the European Union and a number of non-EU countries. VAT is typically collected by businesses and passed on to the government as part of the final price of a product or service.

In general, VAT is applied to the value added to a product or service at each stage of production and distribution, from raw materials to the final retail sale. The VAT rate can vary depending on the type of goods or services being sold and the location of the business.

VAT is typically seen as a consumption tax, as it is paid by the end consumer rather than the business that is providing the goods or services. However, businesses are responsible for collecting and remitting VAT to the government, and they may be able to claim back VAT on certain expenses related to their business.

Why do we pay VAT on Business Energy?

In many countries, VAT is applied to the sale of energy, including business gas and electricity, as part of the value-added tax system. This means that businesses may be required to pay VAT on their energy bills, depending on the location of the business and the type of energy being consumed.

There are a few reasons why VAT is applied to business energy:

  1. To raise revenue: VAT is a major source of revenue for many governments, and applying it to business energy is one way to collect this tax.
  2. To encourage energy efficiency: Applying VAT to business energy can help to encourage businesses to use energy more efficiently and reduce their energy consumption, which can have environmental and economic benefits.
  3. To equalize the cost of different energy sources: VAT can be used to equalize the cost of different types of energy, such as fossil fuels and renewable energy, by applying a similar tax rate to all sources. This can help to encourage the use of more sustainable and renewable energy sources.

How do I find out my business energy VAT rates?

To find out the VAT rates that apply to your business energy, you will need to check the VAT rules and rates that are in place in the country or region where your business is located. VAT rates can vary depending on the type of goods or services being sold and the location of the business, so it’s important to check the specific rules that apply to your business.

Here are a few ways to find out your business energy VAT rates:

  1. Check with your local tax authorities: The government agency responsible for administering VAT in your area should be able to provide information on the VAT rates that apply to business energy.
  2. Consult with a tax professional: A tax professional or accountant can help you understand the VAT rules and rates that apply to your business energy and advise you on any specific issues or questions you may have.
  3. Check online resources: There are a number of online resources that provide information on VAT rates and rules, including the website of the government agency responsible for administering VAT in your area and various tax-focused websites.
  4. Talk to your Energy Supplier: Your Energy Supplier may be able to give you an idea of what your VAT is.

Could my business be exempt from paying VAT on energy?

In some cases, businesses may be exempt from paying value-added tax (VAT) on energy. However, the specific circumstances that would qualify a business for VAT exemption on energy purchases will depend on the laws and regulations in the country where the business is located.

In general, businesses may be exempt from VAT on energy purchases if they meet certain criteria, such as being registered as a non-profit organisation, being a government agency, or being involved in certain types of activities that are exempt from VAT, such as the provision of certain types of healthcare or social services.

To determine whether your business may be exempt from VAT on energy purchases, you should consult the VAT laws and regulations in your country, as well as any guidance provided by your national tax authority. It may also be helpful to seek the advice of a tax professional or legal adviser.

Is my business eligible for the reduced rate of 5% VAT on energy?

If at least 60% of the energy used by your business is utilised for housing or other residential accommodations, or if you are a charitable or non-profit organisation, you may be entitled to pay a reduced rate of VAT on your business electricity and gas bills.

If you consume less than 33 kWh of electricity per day or 1,000 kWh per month, or less than 145 kWh of gas per day or 4,397 kWh per month, you are considered to have low energy usage.

If your usage is sufficiently low, your supplier ought to automatically apply the VAT savings to your bill; nevertheless, you’ll need to double-check this with them.

As long as you’ve supplied your provider a valid VAT certificate, your supplier should instantly apply the savings to your account if your company qualifies for the reduced 5% VAT rate on gas and electricity.

A portion of any overpayments made over the previous four years may be reimbursed if your company has been paying the standard rate of 20% while qualified for the lower rate.

How does the Climate Change Levy (CCL) affect VAT?

The Climate Change Levy (CCL) is a tax on energy used in the UK that is designed to encourage businesses to reduce their carbon emissions and use energy more efficiently. It applies to most types of energy, including electricity, gas, and solid fuels, and is charged at different rates depending on the type of energy used.

VAT is not directly affected by the CCL. However, the CCL is applied to the value of the energy consumed, which includes VAT. This means that the CCL is applied to the total amount paid for the energy, including both the cost of the energy itself and the VAT charged on that energy.

For example, if a business in the UK purchases £100 worth of gas, including £20 of VAT, the CCL will be applied to the total amount of £100, including the £20 of VAT. The business will then need to pay the CCL on top of the VAT and the cost of the energy.

It is important to note that the CCL does not apply to all types of energy or to all businesses. Some businesses, such as certain charities and public sector organizations, may be exempt from the CCL, or may be eligible for reduced rates.

How is VAT on your business energy Calculated?

To calculate VAT on business energy, you would first determine the rate of VAT that applies to the energy you are purchasing. If the energy is subject to the standard VAT rate, you would then multiply the energy cost by the VAT rate to determine the amount of VAT that is due.

For example, if your business is purchasing 1,000 kilowatt-hours of electricity at a cost of £0.10 per kilowatt-hour and the VAT rate is 20%, the VAT on the energy would be calculated as follows:

VAT = 1,000 kilowatt-hours * £0.10/kilowatt-hour * 20%

= £21