Your guide to business VAT relief on your energy bills

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Disclaimer: The information on this page was last updated on 23/12/2022, 10:59:52

Almost all goods and services across Europe incur VAT (Value Added Tax) throughout the production and distribution process. However, some goods and services are VAT exempt and others have reduced rates available.

Find out what kind of relief you could receive and how to apply with our handy guide.

What VAT relief is available for businesses?

Especially as the pandemic hit, you might be looking into VAT relief to help your business stay afloat or cut down on costs. While you can’t often decrease the amount of tax you pay, you might be able to reclaim or pay less VAT.

There are 3 rates of VAT:

• Standard rate (20%)
• Reduced rate (5%)
• Zero rate (0%)

VAT exemption and zero rates

There is often some confusion between VAT exempt products and zero-rated products. While VAT is free for both kinds of products, zero-rated items are taxable. They can have VAT charged at the final sale, but the end customer is charged at a rate of 0%. Neither have any hidden final tax, however, you can add extra charges to zero-rated goods and services.

Which goods and services are VAT exempt?

Businesses that offer goods and services of significant public interest can’t charge any VAT and cannot deduct or recover any input charges. They are mostly exempt where they are offered by public institutions and charities but can also be for private institutions in certain circumstances.

VAT exempt products include:

• Insurance, finance, and credit services
• Medical care
• Social services
• Education and training
• Fundraising events
• Subscriptions to membership organisations
• Commercial land and buildings
• Admissions to galleries, museums, theatres, zoos, theatrical performances, and exhibitions

If your business only sells VAT exempt goods and services, your business will be classed as exempt. Exempt businesses cannot recover or register for VAT on purchases and expenses.

Which products are zero-rated?

While you don’t pay VAT on these goods and services, you’ll still have to record them in your VAT accounts and returns. This is because they are still taxable, just with a 0% VAT rate.

Zero-rated goods and services include:

• Print publications (not including posters, exercise books, and letterheads)
• Children’s clothing and footwear
• Safety boots and helmets
• Certain food and drink
• Animal feed
• Transport for over 10 people
• Sale of donated goods by charities
• Exporting goods as a charity
• Mooring
• Planes and ships

VAT reduced rates

Where the standard rate of VAT is 20%, some businesses will qualify for a reduced VAT rate of 5%. You’ll have to apply for the VAT reduction through the HMRC if you’re eligible for the reduction.

Throughout the pandemic, in order to help out closed businesses, the Government offered reduced rates to more businesses, including the hospitality sector and leisure businesses.

Which goods and services qualify for reduced rates?

Whether or not you can claim this rate depends on both the item and the intended buyer, for example, mobility aids are only eligible for the 5% reduction if they’re installed in the home for someone over 60.

VAT rates are reduced to 5% on:

• Fuel and power (businesses using less than 1,000kWh of electricity and 4,397kWh of gas per month)
• Child safety seats and carrycots
• Energy-saving materials (not purchased by DIY builders)
• Converting premises into residential premises such as bedsits, children’s homes, and hospices
• Welfare advice/information supplies for elderly and young people
• Contraceptives and certain ‘stop smoking’ products
• Mobility aids at home

Can I claim VAT relief on my gas and electricity?

Unfortunately, even exempt businesses such as charities will have to pay VAT on their gas and electricity. However, you should be able to pay a reduced rate of 5%, providing the premises are used only for charitable, non-business purposes.

If the premises are used for both business (this includes the sale of goods) and accommodation or not-for-profit business (also known as “non-business”), you can split the charges. Business use will be charged at the standard 20% while the “non-business” use will be charged at the reduced 5%. Alternatively, if over 60% of the energy is used for your non-business, you could benefit from the 5% reduced rate on your whole supply.

If your business uses less than 1,000kWh of electricity and 4,397kWh of gas per month, you’ll be classed as a ‘de minimis’ business which also qualifies for the reduced VAT rate of 5% on their energy.

You’ll have to apply for this through your energy provider as it won’t be deducted from your bill automatically.

What affects business energy usage?

There are a lot of things that might affect your energy usage as a business.

• Business type – The type of business you run will determine your opening hours, footfall, and machine usage, all of which will affect your energy use. For example, a manufacturing company would use more than an office-based company, which will use less than a retail company, all because of the type of business it is.
• Opening hours – Your opening hours will determine how long you’re using your energy. For example, if your business is open 24/7, you’ll still be using the same or a similar amount of energy overnight as during the day. However, if you’re a 9-5, most of your appliances will likely be turned off between 5 and 9, using almost no energy.
• Location and premises – If you’re located in a small, rural town, your premises are likely to also be smaller while if you have a lot more room, you might want to expand into a larger building. Generally, the bigger the building, the more energy it will use, especially when heating or cooling.
• Number of customers/footfall – If you have a lot of customers in at a time, it will keep the room warmer through their body heat, meaning you won’t need the heating on in the winter, but it’s more likely you’ll need the air conditioning on in the summer. However, the number of customers also determines the workload. For example, more customers in a restaurant will mean that the ovens will be on more.
• Number of employees – The more employees you have, the more appliances, machinery, and space you’ll need, all of which will add to your energy usage. For example, if you have 10 employees in an office-based company, you’re probably using 10 PCs, while if you have 20 employees, you’ll be using 20 PCs, doubling your usage.
• The weather – The weather plays a huge part in any business’ energy usage, mainly due to heating and air conditioning, but the weather can also impact footfall depending on your business. For example, a cafe might have more customers when it’s cold and raining for some shelter and hot food or drink.
• Appliances and machinery – Power-hungry machinery will skyrocket your energy usage, however, you can decrease this with more energy-efficient models. You also have to take into account appliances which need to be on all the time, such as fridges, freezers, and alarms.

How to calculate your business’ energy usage

Energy usage is measured in kilowatt-hours (kWh), which is how many kilowatts you use per hour. You can easily work out how much energy your appliances are using with:

(watts x hours)/1000

For example, the average PC uses 100W. If you have your PC on for 8 hours per day, your PC will be using (100 x 8)/1000 = 0.8kWh per day.

Say you have 10 employees all using their PCs for 8 hours a day, the energy usage of your PCs would be (1000 x 8)/1000 = 8kWh per day.

Assuming you’re open Monday to Friday, there would be around 260 working days in a year. So, we take the 8kWh from your PCs and times by 260 to find out your average PC usage for the year: 8 x 260 = 2,080kWh per year.

To find out your total usage, you would have to do this with everything that uses electricity rather than just your 10 PCs.

Alternatively, you could simply take your meter reading for the month and times by 12 to create a rough estimate of your yearly usage.

What is the average business electricity usage in the UK?

As different businesses are all different sizes, the average usage isn’t one-size-fits-all. Below, we have the average business electricity usage for the different sized businesses so you can compare with your own.

Business size	No. of employees	Average usage
Microbusiness	1-9	10,000kWh
Small business	10-49	20,000kWh
Medium business	50-250	40,000kWh
Large business	250+	65,000kWh

If you use over 100,000kWh of electricity per year, providers will handle your electricity supply differently so you should talk to them directly to find out which supplier and tariff are best for you.

What is the average business gas usage in the UK?

Depending on your business, you’ll use a different amount of gas too. Compare your business to the UK average and see if you match up!

Business size	No. of employees	Average usage
Microbusiness	1-9	10,000kWh
Small business	10-49	25,000kWh
Medium business	50-250	45,000kWh
Large business	250+	75,000kWh

If you use over 200,000kWh of gas per year, providers will handle your electricity supply differently so you should talk to them directly to find out which supplier and tariff are best for you.

How to cut down on your business’ energy usage

Everyone is trying to cut back their energy usage and improve their impact on the environment. As a business, this is a major issue you should be tackling and can also be a great way to encourage new customers.

There are a number of different ways businesses can cut back, including:

• Using laptops instead of PCs
• Upgrading to newer, more energy-efficient machinery
• Using LED or energy-saving lightbulbs
• Switch things off when you close
• Keep doors closed as much as possible to conserve heat
• Only use printers where necessary
• Conduct regular energy audits
• Ensure your employees are on-board

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