Everyone, whether they are part of the general public or business owners, is subject to taxation. Being a business means that not only are you subject to more types of taxation, you are also usually charged higher rates than the general consumer. VAT is one such tax that businesses pay a higher rate. Let’s break down VAT.
What is VAT?
VAT stands for value-added Tax; put simply, it is a tax that is added to all products. VAT is set at a standard rate by governments, some products, however, can be taxed at lower rates, and others can be completely exempt from taxes.
Do I Pay VAT on Energy?
Both gas and electricity are subject to VAT. When you receive your bills for gas and electricity, your supplier will have added VAT to your total. All energy users must pay VAT.
Can I Reclaim VAT as A Business?
Businesses cannot reclaim VAT. This makes it important for a business to choose the best possible energy supplier available to them. This is one way to cut down on the cost of energy used in a business.
While a business cannot reclaim tax on some business, they can pay a reduced VAT rate if they fall under certain categories.
How Can a Business Obtain VAT Relief?
Some businesses can be exempted from paying the standard VAT rate. If the business is eligible, it can claim VAT relief. There are three conditions under which a business can claim relief for VAT on business energy.
If your organization satisfies the legal definition of a non-profit organization; you may be entitled to pay 5% VAT on energy if it is used for domestic purposes, non-commercial activities that are charitable, or if you use less than 1,000 kWh per month. You must submit proof that the organization is a charity in order to acquire your energy at a lower rate.
Energy Usage Criteria
The reduced rate of VAT should be applied to your entire energy bill if 60% or more of your power is used for domestic purposes, such as in a children’s home or self-catering property. If less than 60% of the bill is utilized for domestic purposes, the bill is usually split between the standard business rate and the reduced domestic rate.
Rate of Energy Usage
If your business is a low energy user, then the lower VAT rate should automatically be applied by your energy supplier. To see if you are a low energy user, you must meet certain requirements: If your electricity consumption is less than 33 kWh per day or 1,000 kWh per month. Suppose your gas use is less than 145 kWh per day or 4,397 kWh per month.
If a business falls under any of these three criteria, then it can claim a reduced VAT rate. Your energy supplier will automatically use the reduced VAT rate if you as a business have submitted a VAT certificate.
If, as a company, you have been paying the usual rate of 20% while qualifying for an exemption, you can get a partial refund on any overpayments paid in the last four years.
For the majority of businesses, they are subject to a standard VAT rate on energy. However, under certain conditions, some businesses can pay a reduced VAT rate reducing their energy expenses greatly.