Who will benefit from the VAT cut on electricity bills?

The newly formed Government has announced its first major fiscal policy: removing VAT from qualifying electricity supplies from 1 October until the end of the financial year.

Although the announcement focuses on reducing household costs, the change won’t apply only to residential properties. Charities, landlords and some other electricity users may also benefit.

What’s changing?

Electricity supplied for a ‘qualifying use’ is currently subject to VAT at the reduced rate of 5%.

Under the announced change, qualifying electricity supplies will be zero-rated from 1 October until the end of the financial year. It’s currently estimated that this could save the average household £45 a year.
However, electricity suppliers are expected, rather than required, to pass the saving on to their customers. Users should check their bills to make sure the VAT reduction has been applied.

Qualifying use currently includes:

•    domestic use
•    non-business use by charities
•    supplies that don’t exceed the small quantity, or ‘de minimis’, limits.

The change is intended to benefit households using electricity for domestic purposes. However, charities and other users that currently pay VAT at 5% may also benefit.

This could include certain types of residential accommodation, such as children’s homes, hospices and residential accommodation for school and university students.

Domestic and residential use

The VAT cut aims to ease the pressure of rising fuel and energy costs by reducing the amount domestic users pay for electricity.

If you occupy a residential property and pay for its electricity, you should benefit from the saving from 1 October until the end of the financial year.

The zero rate should apply to electricity used in residential properties. It may also apply to electricity supplied to:

•    self-catering holiday accommodation
•    caravans
•    houseboats
•    certain properties used by charities.

Charities

Charities currently benefit from the reduced rate of VAT on electricity used in relevant residential accommodation, including children’s homes, care homes and hospices.

Charities providing qualifying residential accommodation in return for payment should therefore benefit from the new zero rate.

A charity may also use a property for non-business activities, such as operating a hospice without the aim of generating income. Electricity used for these activities should also qualify for zero-rating.

Where a building is used for both business and non-business purposes, the charity may need to divide the supply between:

•    qualifying non-business use
•    non-qualifying business use.

If more than 60% of the electricity relates to qualifying use, the whole supply may be zero-rated. The charity can usually confirm its qualifying use by giving a certificate to its electricity supplier.

This additional relief will be particularly welcome for charities, as many can recover only a limited amount of the VAT they incur on their costs.

Landlords

Residential landlords will need to consider whether electricity recharged to a tenant qualifies for zero-rating or forms part of the main rental supply.

Where a landlord charges separately for electricity used for domestic purposes, outside the tenant’s rent, the charge should benefit from the new zero rate.

Where the landlord charges a single amount of rent that includes utilities, the utilities will normally follow the VAT treatment of the rent and remain exempt from VAT.

Although tenants may not see a separate VAT saving in these circumstances, the change should reduce the amount of irrecoverable VAT incurred by residential landlords.

Key points

•    Check the VAT rate currently shown on your electricity bills.
•    Make sure your supplier applies the correct VAT treatment.
•    If you recharge electricity costs to tenants, review your invoicing arrangements.
•    Look out for further announcements confirming whether the change will continue beyond the end of the financial year.

Need help?

The VAT treatment of electricity can depend on how a property is used and how the cost is charged. 

We can help you understand whether the new zero rate applies and whether you need to make any changes to your invoicing or VAT records.

Get in touch with your usual Larking Gowen contact or email enquiry@larking-gowen.co.uk.