We take a look at which criteria you need to meet in order to be entitled.

Gas prices have risen rapidly this year, largely due to the conflict in Ukraine which has reduced supplies of Russian gas. You may, now, be looking at ways to face this winter financially and prepare for those additional expenses.

Charities registered with HM Revenue and Customs (HMRC) are entitled to a reduced Value Added Tax (VAT) charge of 5% on their energy bills. As a charity, you must register for VAT with HMRC if your VAT taxable turnover is more than £85,0001. If your charity is not currently recognised as such by HMRC, and is VAT registered, you can apply for recognition online on the following link:  https://www.tax.service.gov.uk/register-charity-hmrc/check-eligibility/register-the-charity. 

Electricity, gas, heating oil and solid fuel for domestic and residential use or for non-business use by a charity qualify for a 5% rate

Supplies of fuel or energy (gas and electricity)

The reduced rate of 5% VAT applies only to goods and supplies that are listed in the VAT Act 19942. Those include electricity, gas, heating oil, solid fuel, coal, heat, and air-conditioning3. Road fuel, gas (hydrocarbon) or vehicle fuels are not included on the list4. To qualify for a 5% VAT charge, your supplies of fuel or energy must be for domestic and residential use or for a non- business use activity.

Supplies that are deemed as or are domestic and residential use

If your charity's fuel/gas supply is less than 2,300 litres and your supply of electricity does not exceed 1000 kilowatt hours a month5, then you are within the 'domestic use' category, and the 5% VAT rate applies.

You will also have a 5% VAT rate if your charity is using the supply of fuel or energy for a hotel, inn, self-catering holiday accommodation, caravan, houseboat, or the whole or part of a residential building/ dwelling6 such as a:

  • Home or institution providing residential accommodation for children.
  • Home or 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 mental disorder7.
  • A hospice.
  • Residential accommodation for students or school pupils.
  • Residential accommodation for members of any of the armed forces.
  • A monastery, nunnery, or similar establishment; or
  • An institution which is the sole or main residence of at least 90 per cent of its residents except if it is used as a hospital or a prison8.

Non-business use by a charity

The VAT Act 1994 does not define what falls within a non-business use. There is a list of questions on the government website which may help your charity decide whether an activity is business use for VAT purposes or not, as follows9: 

  • Is the activity carried on for business or daily work rather than pleasure or daily enjoyment?
  • Is the activity an occupation or function which is actively pursued with continuity?
  • Does the activity have a certain measure of substance in terms of the quarterly or annual value of taxable supplies made?
  • Is the activity conducted in a regular manner and on sound and recognised business principles?
  • Is the activity predominately concerned with the making of taxable supplies for consideration? And if yes, are those supplies being made of a kind which are commonly made by those who seek to profit from them?

If the answer to any of these questions is "yes" then it may indicate that you are undertaking a business activity which will not qualify for the reduced VAT rate. The list of questions is not exhaustive and reflects cases and questions that tribunals have had to face over time.

According to the government guidance for charities10, to decide if an activity is a business activity for VAT purposes, you need to consider whether there is a direct link between the services received and the payment made. The government advises that your charity should apply the following two-stage test11: 

  • Stage 1: The activity results in a supply of goods or services for consideration. This requires the existence of a legal relationship between the supplier and the recipient. An activity that does not involve the making of supplies for consideration cannot be a business activity for VAT purposes.
  • Stage 2: The supply is made for the purpose of obtaining income (remuneration). An activity is not economic just because a payment is received. It must also be carried out for the purpose of obtaining income (remuneration), even if the charge is below cost.

Therefore, if your activity results in a supply of goods or services for consideration and the supply is made for the purpose of obtaining remuneration, this activity may well be deemed to be a business activity for the purposes of VAT.

In practice, it may not always be easy for your charity to distinguish between qualifying and non-qualifying use, and you may need to take legal or accountancy advice.

In-between uses

If 60% or more of your fuel or energy supply is for qualifying use (domestic, residential or by a charity for non-business use), you should treat the whole of your supply as being taxed at 5% VAT12. If it is less than 60%, you will pay the reduced rate of VAT on the supply that qualifies for the 5% rate and the standard rate (20%) on the rest13. 

Make sure your energy supplier knows that you are a charity

It is the supplier's responsibility to make sure that the correct VAT rate is applied. They must take reasonable steps to check with you any condition that they cannot verify for themselves. However, if there is a concern, make sure you give your energy supplier evidence that you are a charity and provide them with a written declaration or 'certificate' confirming that you are eligible for the reduced rate14. As evidence, you can provide your supplier with either your charity commission registration number or a letter of recognition from HMRC.

Footnotes

1 https://www.gov.uk/VAT-charities/registration

2 https://www.legislation.gov.uk/ukpga/1994/23/section/29A (Section 29A of the Value Added Tax Act 1994 ("VAT Act 1994")

3 https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A/part/2/chapter/1/paragraph/1n1 (Schedule 7A of the VAT Act 1994, group 1, paragraph 2)

4 https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A/part/2/chapter/1/paragraph/1n2 (Schedule 7A of the VAT Act 1994, group 1, paragraph 2)

5 https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A/part/2/chapter/1/paragraph/5 (Schedule 7A of the VAT Act 1994, group 1, paragraph 5)

6 https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A/part/2/chapter/1/paragraph/6 (Schedule 7A of the VAT Act 1994, group 1, paragraph 6)

7 https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A/part/2/chapter/1/paragraph/7 (Schedule 7A of the VAT Act 1994 Group1 paragraph 7)

8 https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A/part/2/chapter/1/paragraph/7 (Schedule 7A of the VAT Act 1994 Group1 paragraph 7)

9 https://www.gov.uk/hmrc-internal-manuals/vat-business-non-business/vbnb22000

10 https://www.gov.uk/guidance/how-VAT-affects-charities-notice-7011#sect4

11 https://www.gov.uk/guidance/how-VAT-affects-charities-notice-7011#sect4

12 https://www.legislation.gov.uk/ukpga/1994/23/schedule/7A/part/2/chapter/1/paragraph/4 (Schedule 7A of the VAT Act 1994, group 1, paragraph 4)

13 https://www.gov.uk/VAT-charities/what-qualifies-for-relief

14 https://www.gov.uk/VAT-charities/how-to-claim-relief

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.