All energy is subject to VAT and for most businesses it will be charged at 20%. There are some circumstances in which businesses may be entitled to a reduction in the VAT rate to 5%.
Broadly speaking there are three different ways in which you might qualify for a reduction in consumption:
- You are operating a charity. This only applies to ‘charitable’ activities and not to commercial activities that may support the charity. For instance, a charity shop that supports the activity of a hospice will not be eligible for a reduction but the actual hospice will.
- The energy being bought is for use in a domestic setting. For instance, residential care homes or student accommodation. The organisation that operates the building may be responsible for the purchasing and therefore a commercial contract is in place but the actual site is a living space for the consumers of the energy.
- Finally, if you consume energy ‘at a domestic level’ then you may be charged VAT at 5% under what is termed the ‘de minimis’ rule.
The de minimis rule is applied across billing periods. So, if you are a large consumer but you close your premises for a month then you may be charged at 5% for that month only. Equally, you may use gas only in the winter months for heating and in the summer find that your consumption level only attracts the 5% rate. One of our checks within the invoice validation service is to make sure that the de minimis rule has been correctly applied to all the bills we see.
If at least 60% of your business’s energy is used for domestic purposes, then you’ll be classed as having “mixed energy use” and you may qualify for the reduced rate of VAT. If less than 60% of your energy is used for domestic purposes you may be entitled to a partial reduction.
Generally speaking, Climate Change Levy (CCL) is charged hand in hand with VAT. Reduced VAT usually means that you will not pay CCL. The reason for this is that CCL is a levy charged by the Government to businesses which was originally intended to encourage energy efficiency among business consumers. It is assumed that CCL is not applicable where a reduced rate of VAT applies simply because the function of the building or the consumption level is as though it is domestic. CCL is also subject to VAT so there is additional cost if it has been wrongly applied.
Some businesses who pay 20% VAT may be entitled to a reduction in CCL under the Energy Intensive Users scheme whereby some sectors, such as food and drink manufacture, steel, cement, glass and agriculture agreed targets for reducing carbon emissions and improving energy efficiency and are given a up to a 90% discount on electricity and up to 65% discount on other fuels from the levy. The exemption also allows them to pay less for their energy and to remain competitive in a global market.
We deal with a lot of organisations that are entitled to a reduced rate VAT and checking their bills for the correct application of VAT rates has resulted in money beng returned to our clients on more than 120 occasions last year. Many of the affected companies aren’t required to be registered for VAT and so the refund of CCL and VAT directly benefitted them financially.
If you are a charity, purchase energy for domestic premises, care homes, holiday accommodation, churches or other religious buildings then you should contact us for advice. If you think you are being incorrectly billed, we would be happy to advise you and check your billing status. It is possible to make a claim up to four years in arrears for overpaid VAT so even if your issue is historic let us know.