In times of skyrocketing energy costs such as the present, with interest-rate increases also on the horizon, ensuring that any available VAT relief is explored and, where possible, utilised should be one of the top priorities of indirect tax professionals and finance teams alike. However, not all organisations have access to the same opportunities to make their VAT affairs more efficient during an energy crisis.
In the UK, those that conduct non-business activities have – perhaps counterintuitively – more options at their disposal to reduce VAT costs than most VAT-registered traders.
Charities benefit
For a start, a registered charity that does not get remunerated for any supply it makes is entitled to request the application of the reduced rate of UK VAT (5% instead of 20%) on its energy bills as well as the disapplication of the main rate of Climate Change Levy (CCL), an environmental tax charged on the consumption of gas, electricity and other commodities used by non-domestic users.
Until 31 March 2027, charities can benefit from zero rating on solar-panel installation
To claim this VAT and CCL relief, it is necessary to submit to the energy supplier concerned a VAT certificate (accompanied by any required evidence) per premises and in the format prescribed by HMRC.
Charities that carry out both business and non-business activities may also obtain full relief, provided that they can prove that 60% or more of the fuel or power consumed is for non-business use.
In any other case, the energy supplier will charge VAT at the reduced rate on the portion of the fuel or power consumed that is for non-business use, and the standard rate for the remaining portion.
Since a non-business activity does not allow an organisation to recover VAT as input tax, having the VAT charge slashed by 75% and not incurring any CCL can easily translate into significant savings in times of high energy costs.
One important point to note here is that a charitable organisation that is run on a not-for-profit basis may still be regarded as carrying out a business activity for VAT purposes if it charges for its supplies of goods or services (such as when it sells donated items to the public or rents out a charity-run building), and therefore it would not qualify for the lower VAT and CCL bill.
Solar savings
Until 31 March 2027, charities can also benefit from zero rating on the installation of certain energy-saving materials such as solar panels.
The two main conditions for the VAT-free supply of energy-saving materials are that these must be installed on charitable buildings intended for use solely for a relevant charitable purpose, and that the charity employs a business to supply and install them. In fact, the supply of energy-saving materials without installation is not zero rated.
At the pump
More broadly, with the recent surge in the price of crude oil, the first direct consequence has been the increase in the prices of petrol and diesel at the pump. Since many VAT-registered organisations require their staff to frequently travel by car (often a company car) for all sorts of business purposes, their fuel costs are likely to go up considerably compared with last year, and so is the VAT on the fuel.
However, there is sometimes a misconception that, since the VAT incurred on the purchase of a company car is not recoverable when it is used for both business and personal use, or restricted to 50% in the case of leased cars, any VAT incurred on road fuel in the UK is also irrecoverable or subject to the 50% restriction.
Moving to monthly VAT returns will accelerate the receipt of refunds
On the contrary, VAT incurred on road fuel that is used for business purposes is in principle recoverable as input tax, except, among other things, for any partial exemption or non-business activity restrictions.
An apportionment is obviously required between business and personal use to determine the exact amount of recoverable input tax. This can be achieved in two ways: either by maintaining and using detailed mileage records of the split between personal and business mileage or, in the absence of such records, by applying the so-called fuel-scale charge. This is a way of accounting for output tax on road fuel using a flat-rate basis according to the carbon dioxide emissions of the car.
For full guidance on this subject, refer to the HMRC’s Motoring expenses (VAT Notice 700/64).
Those organisations that have neglected the recovery of VAT on road fuel up until now can also retrospectively submit a VAT refund claim looking back up to four years.
Interest rates
As for the possible increases in interest rates, these can affect the cost of financing working capital requirements for a business. Accelerating cash inflows can therefore become essential and, for those VAT-registered traders that are usually in a recoverable position, moving from quarterly to monthly VAT returns will accelerate the receipt of refunds from HMRC.
The tax-compliance burden will obviously increase (12 VAT returns to file during the year instead of four), but exporters, for example, that buy products domestically subject to 20% VAT and sell overseas without charging UK VAT – as exports are typically zero rated – can improve their cashflow position and reduce the need for expensive short-term borrowing when interest rates are on their way up.
