Blog

VAT on business energy bills

VAT on business energy bills is a crucial issue for small businesses that are not VAT-registered and cannot reclaim the VAT they pay on their bills.

Unlike households, most UK businesses pay VAT at 20% on top of their energy bills, but there are some important exceptions for small energy users and charities.

In this guide, we’ll explain VAT rules on business energy, including VAT rates, small use and charity exemptions.

What is VAT?

VAT stands for Value Added Tax and is a UK consumption tax charged at 20% of the value of most goods and services sold in the UK.

UK businesses play a crucial role in administering and collecting Value Added Tax. Most businesses are VAT-registered and charge VAT to their customers, paying this quarterly to the government.

These businesses also reclaim the VAT they pay on their purchases, including their business energy bills.

VAT-registered businesses are usually indifferent to the VAT charged on energy bills as they reclaim this from the government.

How much VAT do you pay on business energy rates?

Commercial gas rates and business electricity prices are subject to a 20% charge for VAT as standard.

There are two exceptions where VAT is charged at the reduced rate of 5%. These are:

Small energy users; and
Charities

If either of these exceptions applies, you can claim a reduced rate of VAT using a VAT declaration form, which can be requested from your business electricity or commercial gas supplier. With the VAT declaration form you can also reclaim VAT previously paid at the standard rate.

Eligibility for reduced VAT rates on business gas and electricity

HMRC’s VAT rules allow for small quantities of energy supplied to commercial properties to be treated as domestic supplies, with a reduced VAT charge of 5%.

The government defines small quantities as less than the following thresholds:

Reduced VAT thresholds for business electricity

In kWh (as found on both a business electricity meter and a business electricity bill):

33 kWh per day
1,000 kWh per month
12,000 kWh per year

Reduced VAT thresholds for business gas

In kWh (as found on a business gas bill):

145 kWh per day
4,397 kWh per month
52,764 kWh per year

In cubic meters (as found on a metric business gas meter):

13 cubic meters per day
395 cubic meters per month
4,745 cubic meters per year

Reduced rate of VAT on energy for charities

Gas and electricity supplied to commercial buildings used by most charities and other non-profits are taxed at the reduced rate of 5%.

HMRC requires that the charity’s activities are “non-business” and has some quite complex rules around this. We recommend referring to their publication on deciding whether your activities are business or non-business.

Do business electricity and gas quotes include VAT?

No, as with most business-to-business transactions, the prices our business energy comparison team quotes are net of VAT.

Quoting net prices provides a clearer view of the actual cost of energy, as most business energy customers are VAT-registered and reclaim any VAT they pay.

Business energy suppliers also quote their tariff information net of VAT.

Climate Change Levy (CCL) and business energy VAT

The Climate Change Levy is a separate tax charged on non-domestic energy bills.

The Climate Change Levy is included as a separate charge on energy bills, currently 0.775 p/kWh for both electricity and gas.

The Climate Change Levy has the same small business energy thresholds as VAT, so if you are charged the CCL, you’ll also pay VAT at 20%.

The CCL charge is also taxable for VAT, so for each 0.775p/kWh of the CCL charge, you’ll also pay 0.155p/kWh in VAT.

VAT on business energy – FAQs

Our business energy experts answer commonly asked questions regarding VAT on business energy.

How much do I pay in VAT on average business electricity bills?

The VAT you pay on average business electricity bills depends on two factors:

Your total electricity charges: VAT is charged on top of consumption and standing charges, which depend on your tariff and recent meter readings.
Your VAT rate: Most businesses pay VAT at 20% on top of electricity charges, but properties that only consume small amounts of electricity can apply for a reduced VAT rate of 5%.