Managing energy costs as a business owner can be daunting, especially when faced with the complexity of charges and taxes on your bills. Whether you're self-employed, running a small business, or working from home, understanding how VAT applies to your electricity and gas expenses is essential for keeping your finances in check.
This guide simplifies everything you need to know about VAT on business energy bills, helping you uncover potential savings and ensure you're paying the right amount.
Who Needs to Know About VAT on Energy Bills?
VAT on energy bills impacts a wide range of business owners and workers, including:
- Self-employed professionals working from home, who need to navigate the difference between domestic and business energy tariffs.
- Small business owners managing commercial premises, aiming to reduce overhead expenses.
- Home-based businesses that may qualify for reduced VAT rates on their energy usage.
- Startups and entrepreneurs striving to keep operational costs as low as possible.
- Charities and non-profits that could benefit from special VAT exemptions or reduced rates. For charities, our comprehensive guide is perfect to help you understand, take a look at Do Charities Pay VAT in the UK here.
As energy costs continue to soar, understanding the VAT applied to your energy bills has never been more crucial. Even small savings can have a significant impact on your bottom line, making every percentage point matter.
Do Businesses Pay VAT on Energy?
Businesses generally pay VAT on their electricity and gas bills. However, unlike most business expenses where VAT can be reclaimed as input tax, energy costs are handled differently. To find more about how to reclaim VAT, read our blog here.
The standard VAT rate for business energy is 20%, automatically applied to your bill by your energy provider. For example, if your monthly energy usage amounts to £100 before VAT, your total cost will rise to £120 once the tax is added.
It’s important to note the key difference between domestic and business energy rates: while domestic customers benefit from a reduced VAT rate of just 5%, most businesses are charged the full 20%. This disparity can have a significant impact on your overall energy expenses, especially if your business relies heavily on energy consumption.
Who Pays 5% VAT on Electricity and Gas?
The good news is that some businesses can take advantage of a reduced 5% VAT rate on their energy bills, offering valuable savings. Here’s how your business could qualify:
- Charitable organisations and not-for-profits can qualify for the 5% rate, helping to significantly lower operating costs.
- Businesses with domestic energy usage may also benefit. For example, if you work from home and can demonstrate that at least 60% of your energy consumption is for domestic purposes, you could be eligible for the lower rate.
- Low-energy usage businesses may qualify too. If your energy consumption falls below a certain threshold, you might be entitled to pay the reduced 5% rate instead of the standard 20%.
Understanding which category applies to your business and ensuring you're claiming the correct rate is essential to maximizing your savings.
What is the "De Minimis" Rule for Businesses?
The de minimis rule is especially beneficial for small businesses with low energy usage. Under this rule, businesses consuming minimal energy qualify for a reduced VAT rate of 5%, significantly lower than the standard 20%.
You qualify for de minimis treatment if:
- Your electricity usage is less than 33kWh per day (equivalent to 1,000kWh per month)
- Your gas usage is less than 145kWh per day (equivalent to 4,397kWh per month)
To put this into perspective, using 1,000 kWh of electricity per month would typically cost between £200 and £300 (excluding VAT), depending on your supplier and tariff. For many small businesses—especially those operating from home or with low energy needs—staying below this threshold is often manageable.
If you qualify, your energy supplier should automatically apply the reduced rate. However, it’s always a good idea to review your bills to ensure the correct rate has been applied, as errors can sometimes occur.
When the 20% VAT Rate Applies
Most businesses are subject to the standard 20% VAT rate on their energy bills. This rate typically applies in the following cases:
- Standard commercial premises: Offices, retail spaces, warehouses, and manufacturing facilities that do not qualify for reduced VAT rates.
- Businesses exceeding the de minimis thresholds: Regardless of size or structure, businesses that use energy above these thresholds must pay the standard rate.
- Mixed-use properties: If over 40% of the property’s total energy consumption is for business purposes, the standard rate applies, and the domestic VAT rate cannot be claimed.
In addition to the 20% VAT, businesses are often required to pay the Climate Change Levy (CCL)—an environmental tax designed to encourage energy efficiency. As of 2021, the CCL is charged at £0.00775 per kWh for electricity and £0.00465 per kWh for gas.
On the bright side, businesses eligible for the reduced 5% VAT rate are often exempt from the Climate Change Levy, offering further potential savings on energy costs.
How Debitam Can Help Manage Your Business Expenses
Tracking expenses as a small business owner can be tricky, especially when it comes to energy costs and VAT rates. But the right tools can make it simple!
Here’s how digital expense tracking can help:
- Categorise energy costs accurately for tax purposes.
- Monitor usage patterns to spot savings or qualify for reduced VAT rates.
- Track cost changes over time to budget better and catch billing errors.
- Stay organised with proper records for HMRC, even with mixed-use claims.
With streamlined expense management, you can save time, cut costs, and focus on growing your business—not wrestling with paperwork! Let`s have a chat today!
