VAT (Value Added Tax) is a tax that the government charges on most goods and services. Businesses that are registered for VAT have to charge VAT on the products or services they sell, and they can also reclaim VAT on the purchases they make for their business. Now, Can a Business Reclaim VAT on Electricity?
Before I go into details, what is VAT on electricity? Can a business reclaim VAT on the energy they use for their operations? The answer is not so straightforward, as it depends on several factors, such as the type of business, the amount of energy used, and the purpose of the energy use.
In this blog post, we will explain the basics of VAT on electricity, the different rates that apply, and the conditions for claiming VAT relief or refund.
What is VAT and How Does it Work?
VAT is a value-added tax that is added to the price of most goods and services in the UK. The standard rate of VAT is 20%, which means that for every £100 you spend, you pay £20 in VAT.
Businesses that are registered for VAT have to charge VAT on the products or services they sell to their customers. They also have to pay VAT on the products or services they buy from other businesses. However, they can reclaim VAT on the purchases they make for their business, as long as they have a valid VAT invoice from the supplier.
This means that businesses only pay VAT on the value they add to their products or services. When a business buys materials for £100 + £20 VAT and sells them for £150 + £30 VAT, they can reclaim the £20 VAT paid on purchase and only owe £10 VAT to HMRC.
What are the VAT Rates on Electricity?
The standard rate of VAT on electricity is 20%, which is the same as most other goods and services. However, some businesses may be eligible to pay a reduced rate of 5% if they meet certain criteria.
The reduced rate of 5% applies to businesses that:
- Use less than 33 kWh of electricity per day (or 1,000 kWh per month)
- Use less than 40% of their energy for business purposes
- Are not-for-profit organizations or charities
- Are in certain sectors, such as agriculture, horticulture, forestry, or fish farming
To claim a reduced rate, provide a valid VAT certificate to the energy supplier for a bill discount.
Read here: How to Avoid VAT with Two Businesses
Can a Business Reclaim VAT on Electricity?
Unfortunately, unlike other business expenses, VAT on electricity cannot be reclaimed by businesses. Electricity falls under a different set of rules because it is considered a supply of goods, not services.
However, there are some exceptions to this rule. For example:
- If a business has been paying the standard rate of 20% while being eligible for the reduced rate of 5%, it can claim a partial refund from its energy supplier or HMRC.
- If a business uses electricity for VAT-eligible goods/services production, it can reclaim VAT on electricity as input tax, following standard rules.
For example, if a bakery uses electricity to bake bread that is sold with VAT, they can reclaim the VAT on the electricity as input tax.
However, if they use electricity to heat their premises or light their shop, they cannot reclaim the VAT on that portion of their energy use.
How to Save Money on VAT and Electricity
Though VAT reclaim on electricity is limited, businesses can still save on energy bills and lower tax liability. Here are some tips:
- Check your eligibility for the reduced rate of 5% and provide your VAT certificate to your supplier if you qualify
- Compare energy prices from different suppliers and switch to a cheaper deal if you find one
- Monitor your energy consumption and look for ways to improve your energy efficiency
- Install renewable energy sources, such as solar panels or wind turbines, and benefit from tax incentives and feed-in tariffs
- Claim capital allowances for investing in energy-saving equipment or machinery
Electricity VAT complexity varies based on business type, size, energy use, and sector. Meeting specific criteria may qualify businesses for a 5% reduced rate or partial refund on VAT reclaim for electricity.
Consult an accountant or tax adviser to understand VAT reclaim on electricity and its impact on your business. You can also visit the official websites of HMRC and usave.co.uk for more information and guidance.
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