A guide to energy and VAT for charities and non-profits
Energy suppliers often categorise charities as small businesses when it comes to working out their energy bills. But, unlike with most small businesses, charity VAT exemption rules means there are certain charity discounts for energy, for which non-profit organisations might also qualify.
If you run a charity or not-for-profit organisation and weren't aware of this, you could be one of potentially thousands of charities across the UK that are paying too much for their business energy. Here’s all you need to know about VAT on energy bills for charities, including the rates of VAT on electricity for charities and the VAT rates you should be paying on your gas bills.
VAT exemption for charities and non-profits
VAT rules for the charity sector really aren't clear. Charities and non-profit organisations are entitled to a VAT reduction of 15% - from 20% to 5% - on energy used for non-business purposes, as well as exemption from the [Climate Change Levy] (/business_energy/glossary) (CCL), which also reduces bills by 5%.
The bad news is that suppliers don't automatically apply these discounts, which means many UK charities end up paying significantly more - as much as 20% - for their business gas and electricity.
A recent study has shown that over a third (37%) of charities did not know they are entitled to claim the reduced VAT and CCL exemption, and even more (74%) were unaware that rebates for overpayment can be claimed as far back as 2009.
The good news is that it’s not too late to act.
You can still benefit if your non-business use is below 60% of total usage, because the reduced VAT rate can be applied to that proportion of the supply. For example, if 35% of energy use is non-business, 35% can be taxed at 5% and 65% at the standard VAT rate.
Other types of energy use (at least 60% of the overall use) that qualify the organisation for the VAT reduction are:
- Domestic use
- A building, or part of a building, which consists of a dwelling or number of dwellings
- A building, or part of a building, used for a residential purpose
- A home or other institution providing residential accommodation for children
- A home or other institution providing residential accommodation with personal care for persons in need of personal care by reason of old age, disablement, past or present dependence on alcohol or drugs or past or present medical disorder
- A hospice
- A residential accommodation for students or school pupils
- Residential accommodation for members of any of the armed forces
- A monastery, nunnery or similar establishment
- An institution which is the sole or main residence of at least 90% of its residents (except use as a hospital, a prison or similar institution, a hotel, inn or similar establishment)
- Self-catering holiday accommodation
- A caravan or a houseboat
What's the difference between business and non-business use?
Non-business use is where no charge is made for products or services offered by the organisation, or where the only income is a non-business grant (for example, a day centre for the elderly, funded by social services) or voluntary donations. It also includes the provision of welfare services to all distressed people, and if provided consistently below cost - at least 15% (this includes services for the elderly, infirm, handicapped people, the chronically sick and the poor).
Business activities include fund-raising efforts where goods or services are given in return for payment - such as rent, admission fees, catering or a jumble sale.
Does your business qualify for charity energy discounts?
All the following businesses may be eligible for reduced rate of VAT on business electricity and gas, as well as CCL exemption:
- Charities (registered or unregistered)
- Non-profit organisations
- Village halls, sports clubs, community centres, etc.
- Free schools and academies
- Care homes
Businesses using less than 4,397 kWh/month of gas or 1,000 kWh/month of electricity.
There are currently more than 200,000 charities registered in the UK, along with several smaller, less well-known charities that have an income below £5,000 - all of which are eligible for the reduced rate.
Any business that has energy use that falls below the de minimis threshold will also qualify for the reduced rate on VAT. This means that if your business uses 145kWh or less of gas per day (4,397 kWh per month) or 33kWh or less of electricity per day (1,000 kWh per month), then it will also qualify for the reduced rate.
Are there any other charity energy exemptions?
Charities are also exempt from the Climate Change Levy (CCL), a tax that was introduced to encourage various sectors to improve energy efficiency and cut their greenhouse gas emissions.
The levy is paid by non-domestic energy users on a per-unit basis, but some companies are exempt from paying the CCL, depending on the amount of renewable energy they use, although nuclear power - despite having no direct impact on carbon emissions - is subject to the charge.
Why are charities and not-for-profits overpaying for energy?
There are several reasons why charities and not-for-profits are being overcharged for gas and electricity, but it’s usually because stakeholders are unaware of the exemptions and reduced rates and their supplier hasn’t put them on the correct rates by default - unfortunately, the onus for making sure the correct rates are being paid isn’t on the supplier, but on the charities themselves.
This also presents another problem, as those charities who are aware of the reduced rates may consider the business energy comparison process to be too time-consuming and might not have the relevant resources within their admin teams.
That’s where the business energy experts at UKPower can help. One quick call to us is all it takes to make sure your organisation is paying the correct rates and is with one of the best energy suppliers for charities and not-for-profits. Different suppliers have different strengths and weaknesses, so it’s important to make sure you’re with a provider that can adequately meet the needs of your organisation.
To get started, simply click ‘Compare prices’ in the box at the top of the page.
Another reason is that many are unaware that claims on overpayments can be backdated for up to four years.
Can charity VAT claims be backdated?
Yes, absolutely. You can claim up to four years of back payment. You should expect a rebate from your supplier for the difference between 5% and the standard rate of VAT charged at the time of the bills. UKPower can talk you through your bill and identify whether you are able to make a claim.
How to apply for VAT exemption for charities
The first thing you need to do is find out the rate of VAT your organisation is paying on its gas and electricity. To do this, take a look at your latest energy bills, if the VAT rate is the standard 20%, you need to make sure this is changed to the correct rate for future payments and also take the necessary steps to get any previous payments backdated.
It you're eligible for exemptions or rebates, you'll need to fill out a VAT Declaration form, which you can get from your suppliers, or downloaded it online – you can find out more at GOV.UK. Upon receiving a VAT Declaration form, suppliers usually take around 14 days to review the application and return with a decision.
When this is done, you need keep an eye on the bills from your charity electricity suppliers to make sure you’re not put back to the standard VAT rate by mistake. You should also do this when your energy contract is up for renewal or when you switch business energy suppliers.
It’s also worth checking out the range of energy saving grants for charities and renewable energy grants for charities. To find out what’s available in your area, simply do an online search for ‘energy efficiency grants for charities’ or ‘best renewable energy grants for charities’.
You should also see if you can save even more money by switching to a better deal from a charity energy supplier. Enter your postcode at our business energy switching page to start your price comparison and our energy experts will help you find a great deal from of of the best energy suppliers for charities in the UK.
For more information on VAT discounts, charity VAT relief, or CCL exemption, give UKPower a call on 0800 688 8773.