VAT on Business Electricity and Gas Explained

VAT is a tax administered by HMRC and applied to the supply of goods and services in the UK. The supply of fuel and power — including electricity and gas — is subject to VAT, but the rate that applies depends on the nature of the supply and how the energy is used.

HMRC's VAT Notice 701/19 (Fuel and power) sets out the rules governing VAT on fuel and power supplies. This notice is the primary reference document for understanding how VAT applies to electricity and gas bills and is available on the gov.uk website. Businesses and their advisers should refer to the current version of this notice, as the rules can change.

The VAT treatment of a business energy supply is not determined solely by whether the customer is a business. It depends on the nature of the use to which the energy is put and, in some cases, the quantity supplied. The supplier applies VAT based on the information available to them, which is why the declarations a business makes to its supplier can be relevant.

Under the rules set out in HMRC VAT Notice 701/19, the supply of fuel and power can be subject to either the standard rate of VAT or the reduced rate, depending on the circumstances. The standard rate of VAT applies to most commercial energy supplies. The reduced rate may apply in certain qualifying circumstances.

The reduced rate of VAT on fuel and power is available in specific situations defined by HMRC, including supplies to certain qualifying bodies and supplies used for qualifying purposes. The rules are detailed and the eligibility criteria are specific. Whether the reduced rate applies to a particular supply is a matter for the supplier and, ultimately, HMRC to determine based on the facts.

Tax rates are set by Parliament and administered by HMRC. The rates applicable at any given time are published in HMRC VAT Notice 701/19 and on the gov.uk website. This page does not reproduce specific rate percentages, as these are subject to change. Always check the current HMRC guidance for the rates in force at the time of your supply.

Where energy is used for a mix of purposes — some qualifying and some not — the VAT treatment may need to reflect that mixed use. HMRC's rules address how mixed-use supplies should be handled, and the supplier will typically need information from the customer to apply the correct treatment.

The rules on mixed use are detailed and the correct approach depends on the specific facts. Where a business believes that part of its energy use may qualify for different VAT treatment, it should discuss this with its supplier and seek advice from its accountant or tax adviser before making any declaration to the supplier.

Making an incorrect declaration to a supplier — whether overstating or understating qualifying use — can have VAT consequences. Businesses should ensure that any declaration they make to their supplier is accurate and supported by the facts of their situation.

Where a business believes it may be eligible for reduced-rate VAT treatment on its energy supply, it will typically need to make a declaration to its supplier. The supplier relies on this declaration when determining the rate to apply. The form and content of the required declaration depends on the basis of the claimed eligibility.

Suppliers are entitled to rely on declarations made by customers, but the responsibility for the accuracy of the declaration rests with the customer. If a declaration is found to be incorrect, there may be VAT consequences for the business. HMRC guidance on the required form of declarations is set out in VAT Notice 701/19.

If you are considering making a declaration to your supplier about the VAT rate applicable to your energy supply, we strongly recommend that you seek advice from your accountant or tax adviser before doing so. Free Energy Help can note that a VAT query may exist when reviewing your supply, but we cannot advise on the content of any declaration.

Climate Change Levy (CCL) is a separate government levy charged on the supply of taxable commodities — including electricity and gas — to business users. CCL and VAT are distinct charges and are governed by separate legislation and HMRC guidance. The rules on exemption or relief from CCL are different from the rules on VAT rates.

There is, however, a relationship between CCL and VAT in certain circumstances. Where a supply is exempt from CCL, this can affect the VAT treatment of that supply. The interaction between CCL exemption and VAT is addressed in HMRC guidance and is a further reason why businesses with questions about their energy tax position should seek professional advice.

For a general overview of Climate Change Levy and how it may appear on business energy bills, see our separate guide on Climate Change Levy.

If a business believes that the wrong rate of VAT has been applied to its energy bills, the first step is typically to raise the matter with the energy supplier. The supplier can review the VAT treatment applied to the account and, where appropriate, issue corrected invoices.

Whether any correction can be applied retrospectively, and for how long, depends on the specific circumstances and the applicable rules. Free Energy Help cannot guarantee that any correction will be made or that any retrospective adjustment will be available. These are matters for the supplier and, where necessary, HMRC to determine.

Where a business believes it has overpaid VAT on its energy bills, it should seek advice from its accountant or tax adviser before approaching the supplier. A professional adviser can help to assess whether a claim is likely to be valid and how to proceed appropriately.