Over 200,000 charities may be paying more VAT on their gas and electricity bills than they need to, according to a recent report by UK Fundraising. This money, which can’t be reclaimed even by VAT-registered charities and their associated commercial enterprises, is depriving charities of tens of millions of pounds a year.
If you are responsible for selecting your charity electricity supplier or charity gas supplier, what do you need to know about VAT? If your charity qualifies for a reduced rate of VAT, what do you need to do to claim it? And can you claim back overcharged VAT on charity electricity and charity gas from recent years?
For charities wanting to maximise their use of revenues to fund the causes they were set up to support, we cover in this article:
- should you charity be VAT registered
- if so, how do you register your charity for VAT
- the VAT on your charity’s electricity and gas bills
- how to pay 5% VAT on your gas and electricity bills and not 20%
- can charity VAT reclaims be backdated?
- the types of organisations and charities which would benefit the most from the lower rate VAT. And
- whether now is the right time to switch supplier.
Should your charity be VAT registered?
Charities are not exempt from VAT rules. If your charity’s VATable sales are above the threshold of £85,000, you must register for VAT (more on how to do that below).
VAT is a complicated and technical tax which many businesses, even with accounting and bookkeeping support, find difficult to manage, report, and pay. For smaller charities, often doing without the support of accountants and bookkeepers for budgetary reasons, VAT can be particular complex.
Many charities do not choose to register for VAT if their VATable sales are below £85,000 – it’s understandable that they wish to concentrate as much of their organisation’s efforts and resources as possible in pursuit of the charity’s missions and aims.
However, whether you are above or below the threshold, there may be a case for registering particularly if your charity purchases a significant amount of goods and services on which it must pay VAT where there is no charitable exemption available.
How to register for VAT
You can register your charity for VAT online at the Government’s website – click here.
Please remember to take advice from an accountant or a bookkeeper on the specific advantages and disadvantages for your charity registering for VAT before completing the online form.
VAT on your charity’s gas and electricity
Most businesses and organisations pay VAT at the rate of 20% of the value of their bill. Unlike many other goods and services supplied to business which are subject to VAT, VAT can not be claimed back on energy bills.
So even if your charity was VAT-registered, it could not claim the 20% it paid on top of the invoice back.
How do you qualify for a 5% VAT rate of gas and electricity?
Charities (and other organisations) are entitled to be charged VAT at 5% if their consumption is:
- less than 1,000kWh per month of electricity (equivalent to 33kWh per day) or
- less than 4,397kWh per month of gas (equivalent to 145kWh per day).
Your supplier should automatically apply a 5% VAT rate on these usage levels – it may be worth checking old bills now to see if the rate has been historically applied to your charity’s bills.
In addition, 5% VAT may be charged on business gas and electricity supply if:
- the customer is a non-profit organisation or a charity, or
- the premises billed provides residential accommodation like an elderly care home or a children’s home.
If 60% of energy consumed is used domestically (for example, a flat above a shop), then the lower rate is payable on the domestic part of the bill and the higher rate on the commercial part.
What should I do if my charity has overpaid?
If your charity has paid more VAT than it should have done in the past, then you can apply for VAT relief.
Apply through your supplier for the lower rate using a VAT declaration form. With your application, you’ll need to show that you are a charity and provide a written statement (sometimes called a certificate) that you qualify for the relief.
The type of proof you’ll need to show your energy supplier will be a letter of recognition from HMRC or your Charity Commission registration number.
Can charity VAT claims on energy consumption be backdated?
Yes. You can claim a rebate on all erroneous VAT payments on your electricity and gas supply over the previous four years. You can claim the VAT back either from HMRC or your supplier.
What about the Climate Change Levy?
If your charity qualifies for the 5% VAT rate, then you will also qualify for exemption from the payment of other government duties like the Climate Change Levy.
Current and future Climate Change Levy charges are currently priced at:
| Rate from 1 April 2020 | Rate from 1 April 2021 | |
| Electricity (£ per kilowatt hour (KWh)) | 0.00811 | 0.00775 |
| Gas (£ per KWh) | 0.00406 | 0.00465 |
| LPG (£ per kilogram (kg)) | 0.02175 | 0.02175 |
Make sure that you confirm with your current supplier that, following the re-rating of your supply to 5%, they will not charge you the Climate Change Levy.
You can benefit from a climate-related reduction in your gas and electricity bills by agreeing to and signing a climate change agreement. If you do, your charity will benefit from the following discounts on its gas, electricity, and LPG bills:
| Rate from 1 April 2020 | Rate from 1 April 2021 | |
| Electricity | 92% | 92% |
| Gas | 81% | 83% |
| LPG | 77% | 77% |
Examples of the types of charities and organisations which qualify for the 5% rate
In addition to charities, the following organisations should enquire about their eligibility for the 5% VAT rate and exemption from the Climate Change Levy:
- care homes
- churches
- community centres
- free schools or academies
- monasteries and nunnery
- non-profit organisations
- self-catering holiday accommodation
- sports clubs
- student accommodation
- village halls
Should my charity switch supplier?
You don’t have to change suppliers:
- to benefit from the reduction to 5% of the VAT on your energy bills,
- to apply for overpaid VAT from the last four years, or
- to exempt your organisation from the Climate Change Levy – you can do that all with your existing supplier.
Whether you want to do so is a different matter altogether though. You may feel that your current supplier did not do their due diligence correctly when you signed up and, although you can get the money back, you shouldn’t have had to pay it in the first place. That money could have remained as part of your charity’s general cash buffer to protect it against the ups and down of donations, sales, and other fee income.
To find better electricity prices for charities and better gas prices for charities from which your organisation can benefit, then you should consider switching charity supplier. Keeping a charity up and running with the cash it needs in the bank is a struggle and even an additional £100 in energy savings each year could mean a lot to your organisation.
We’re happy to look around on your behalf and find the 3-4 most competitive quotes among our panel of suppliers for you. Our service is free and there’s no obligation on you to take up any deal we find on your charity’s behalf.