Treatment of supplies of electricity and piped gas: general
A supply of goods
A supply of electricity or piped gas is deemed to be a supply of goods.
VAT Act 1994, Schedule 4, paragraph 3: The supply of any form of power, heat, refrigeration or other cooling, or ventilation is a supply of goods.
Time of supply
For information on the basic time of supply position for energy and piped gas please see VATTOS9700: VAT time of supply: Tax points for specific types of supply: Utilities (water, gas, electricity and the like).
Many suppliers issue bills to domestic customers that are not VAT invoices. The effect of this is that those suppliers are effectively cash accounting for these supplies. The time of supply is the date that the payment is received. Invoices showing the legend This is not a VAT invoice will not be treated as VAT invoices.
Examples of tax points
|Method of payment||Time of supply|
|meter cards or tokens, rechargeable keys||date payment is registered in payment machine, or received by company/agent|
|thrift stamps||date redeemed (provided no VAT invoice issued)|
|unidentified cash suspense||date identified to customer|
Change of VAT rate
The special rules set out in VATTOS7000: VAT time of supply: Treatment of supplies affected by a change in VAT apply equally to supplies of electricity and piped gas.
For supplies spanning a change of VAT rate, traders may normally choose to adopt the rate or liability in force at the basic tax point. But as there is no basic tax point for supplies of electricity or piped gas, our policy on previous occasions has been to accept an apportionment based on:
- a meter reading by the customer or the supplier (this takes precedence, if known);
- the number of days before/after the change of rate; or
- the number of days before/after the change of rate, but weighted for seasonal use. This method - generally based on the supplier’s billing system that estimates consumption - should be agreed between HMRC and the supplier.
The adoption of a similar approach on future occasions may depend on the circumstances of the change.
Period of supply
The period for calculating whether a supply is within the de minimis limits is:
- for ordinary metered or estimated bills - the period shown on the bill;
- for normal credit meters - the period covered by bill; or
- for budget plans - the period of agreement.
The electricity consumed is calculated by the number of days between meter readings or, if not known, the interval between billing points.
Estimates of consumption may be used to determine whether the supplies are de minimis. A notional meter reading date - possibly the bill date - must be used.
Where a number of bills are cancelled and reissued, the supply company may show the details of the recalculated bills as separate lines on one document, rather than issuing an individual document for each recalculated bill. Where this practice is followed, the supply company may decide whether it tests each separate line for de minimis, or whether it calculates de minimis over the total period covered by the replacement bill. This may change the rate of VAT on the supply.
Where a reissued bill contains a number of lines, and a new line covers additional units consumed between the supply company’s meter reading and a reading taken by the customer, the supply company may decide only to test that last line for de minimis. This is because it is only the additional line that has changed.
Where a supplementary bill is issued, it should be treated as a separate supply.
Supplies of piped gas and electricity are governed by the Gas Act 1986 and Electricity Act 1989. Under the terms of this legislation, supplies are made to the customer in relation to specific premises. This has a number of implications for their VAT treatment:
- electricity and piped gas supplied to a customer at various premises are treated as being supplied separately;
- the de minimis limit must be considered independently for each set of premises;
- where appropriate, a separate certificate should be given to the supplier to evidence the amount of qualifying use for each set of premises;
- a certificate given to a supplier as evidence of qualifying use ceases to have any effect if a customer moves premises: a new certificate should be given to the supplier in respect of the new premises, where appropriate; and
- any unused prepayments in respect of a supply to specific premises cannot be transferred to different premises.
HM Revenue & Customs’ definition of what constitutes premises is: a building or collection of buildings in close geographical proximity, owned or occupied by one customer within a defined curtilage on one site, where each building serves the other in some necessary or reasonably useful way.
However, this is not a legal definition for VAT purposes. It is therefore necessary to look at the individual circumstances in each case.
Points to watch out for
Electricity companies are unable to bill their customers on any basis other than primary meter. Billing on the basis of primary meter is not in itself incorrect and in most cases will make no difference to the VAT treatment. But revenue could be at risk if more than one meter is installed in premises as defined above.
Special attention should be paid to supplies to customers who are not fully taxable. For example, if a bank occupies an entire office block, it is likely that the entire block would be seen as a single set of premises. This would mean that they were probably receiving a single standard-rated supply rather than several - potentially de minimis and therefore reduced-rated supplies.
On the other hand, individual offices in the same block could be seen as separate premises if different companies occupied them, each being supplied separately.
See VFUP2525 for advice on the use of sub-meters.
Invoicing and billing
Many energy companies have several billing systems, some of which were inherited following company takeovers. Some systems are capable of billing electricity, gas and telephone services on one bill.
However, some of the older billing systems were developed prior to the introduction of VAT on fuel and power. As changes to these systems are extremely costly, and suppliers have to bill millions of customers, we have agreed that:
- there is no need for specific numbering of VAT invoices - a combination of customer account number and date is sufficient;
- credit notes need not be issued where replacement bills clearly indicate to customers that the original VAT invoice is cancelled.
Where a replacement bill is issued to a business customer, there is a risk that the customer may claim input tax twice. For this reason, assurance officers should pay careful attention to customers’ energy invoices.
Many supply companies offer budget payment plans. In the main, domestic customers take these up. The terms and conditions will vary from one energy company to another, but a common factor with all such plans is that, at the beginning of the payment plan period, the supplier will estimate whether the customer is likely to be within the de minimis threshold. At the end of the payment plan period, the supply company will review actual consumption against their original estimate and issue a corrected bill to the customer. The adjustment is accounted for on the energy supplier’s next VAT return.
Cash accounting suppliers do not need to claim relief on bad debts (see above). As no money has been received, no tax point has occurred.
Payments received in error
See VATTOS5110: VAT time of supply: actual tax points: payments: is the payment in respect of a supply? for information on payments received in error.
Where unmetered supplies of fuel and power are made together with supplies of accommodation, we regard the supplies of fuel and power as being an integral part of the main supply of accommodation. But there can also be occasions when unmetered supplies are not linked to supplies of accommodation, for example supplies of power to street lighting, road sign lighting, telephone kiosks, and temporary supplies to builders. Such supplies are made against a contract with the customer, each contract constituting a separate supply.
To determine whether the reduced rate can be applied to an unmetered supply the total consumption within the contract is tested against the de minimis limit. This contrasts with the rules for CCL in Notice CCL1: A general guide to Climate Change Levy, which require the supplier to aggregate the consumption within all contracts held with the same customer before applying the de minimis test.
Many electricity and gas suppliers include a standing charge on their bills. Sometimes known as a Distribution Use of System (DUOS) charge, this covers the fixed costs incurred by the supplier, such as maintenance of supply lines and infrastructure, accounting and billing, and provision of emergency services.
The standing charge is treated as part of the supply of gas or electricity, and is subject to tax according to whether the supply is for qualifying use (see VFUP2200) or not. This policy is in line with the judgement of the European Court of Justice in the case of Card Protection Plan. A description of that case and its general implications for questions of single and multiple supply can be found in VATSC82070 VAT supply and consideration: single and multiple supplies: precedent cases Card Protection Plan.
If no gas or electricity is consumed, the supply will be deemed to be for domestic use (see VFUP2310). In these circumstances, the standing charge is still subject to the reduced rate of VAT.