Business Energy Procurement for Charities

If your charity is paying 20% VAT on its energy bills, there is a reasonable chance it shouldn’t be. The 5% reduced rate of VAT applies to energy used for non-business purposes by charities — and the definition of qualifying use is broader than most charity finance teams realise. Similarly, the Climate Change Levy exemption available to charities is widely underclaimed: Ofgem data and our own experience suggest that a significant proportion of eligible charities are paying full CCL on energy supplies where they’re entitled to pay nothing. These aren’t marginal savings. On a £30,000 annual energy bill, correcting VAT alone is worth £4,500 a year.

The 5% VAT rate: who qualifies and how to claim it

The 5% reduced rate of VAT on energy applies where the supply is used for a “qualifying use.” For charities, qualifying use means energy consumed in the course of non-business activities — broadly, activities that further the charitable purpose rather than generate income. A charity running a community centre where services are provided free or at a nominal charge to beneficiaries will typically qualify. A charity running a commercial trading arm from the same building will need to apportion.

The mechanism is a declaration to the energy supplier. The supplier doesn’t automatically apply the lower rate — the charity must declare its status and qualifying use in writing. Suppliers are entitled to take this declaration at face value; they’re not required to verify it independently. The declaration should specify the percentage of consumption that relates to qualifying charitable use, and VAT is charged at 5% on that proportion and 20% on the remainder.

What surprises many charity finance directors is that this isn’t a complex process — it’s a letter or form submission. The reason most charities haven’t done it is simply that nobody told them they could. Energy suppliers have no commercial incentive to advertise it, and the charity’s energy contract may have been set up by a trustee or volunteer years ago without specialist knowledge.

CCL exemption: the levy most charities are still paying

The Climate Change Levy applies to gas and electricity consumed for business purposes. Energy consumed for non-business charitable purposes is exempt from CCL entirely — both the main rate and the carbon price support rate. The exemption is claimed through a PP11 form (for electricity) or a PP10 form (for gas), submitted to the energy supplier along with evidence of charitable status.

Again, the supplier won’t apply the exemption without a formal declaration. And again, the majority of eligible charities we encounter haven’t made one — sometimes because they didn’t know the exemption exists, sometimes because a change of supplier reset the position and nobody updated the forms.

CCL rates have increased substantially since 2019. The current electricity rate is 0.775p/kWh and the gas rate is 0.672p/kWh. For a charity consuming 200,000 kWh of electricity per year, the full exemption is worth approximately £1,550 annually on CCL alone, on top of the VAT saving.

Mixed-use premises: how apportionment works

Many charities operate from premises that serve multiple functions — a charity shop at street level with offices above, a community hall that’s let to commercial users three nights a week, or a residential care facility with a commercial kitchen. In these situations, neither the full 5% VAT rate nor the full CCL exemption applies to the entire supply.

The approach is apportionment: the charity estimates what percentage of its energy consumption relates to qualifying non-business use, declares that percentage to the supplier, and pays the reduced rate on that portion only. HMRC provides guidance on acceptable apportionment methodologies, and the most defensible approach is one based on floor area, hours of use, or submeter data where available.

The key point is that mixed use is not a barrier to claiming — it just requires an honest calculation. A charity that uses 60% of its premises for qualifying charitable purposes and 40% for commercial activities should declare 60% qualifying use and claim accordingly. Too many charities treat the complexity as a reason to do nothing, and pay 20% VAT and full CCL across the board as a result.

The procurement angle: every pound saved is a pound freed for purpose

Charities often have a cultural reluctance to spend time on commercial negotiations. Energy is seen as a necessary cost, not an area for strategic focus. But for organisations where every pound diverted from mission is a pound that doesn’t reach a beneficiary, energy procurement is a direct charitable activity.

The framework contract route — procurement via public sector frameworks such as those run through Crown Commercial Service or sector-specific buying groups — offers one avenue for charities that want a structured process without a full open-market tender. For larger charities, or those with multiple sites, an independent consultancy-led tender will typically deliver better rates than any framework. Our fee is agreed upfront and can be paid directly or via the supplier — whichever suits the charity.

📱 WhatsApp: 07360 272168 | 📧 hello@telnergy.com | 📞 01202 028888 Telnergy Limited · Independent commercial energy consultancy since 2002 · Ofgem registered TPI · ADR Ref E3561 · CRN 04576876 · Christchurch, Dorset

FAQ

Our charity has never submitted a VAT or CCL declaration. Can we backdate a claim? For VAT, the reduced rate applies from the date the declaration is made — suppliers are not obliged to backdate it, though some will make a goodwill adjustment. For a more substantial backdated VAT claim, you would need to pursue it directly through HMRC. The practical message is: submit the declarations now, and start saving from this point forward.

We operate from a building owned by our local authority on a long lease. Does that affect our ability to claim? Your VAT and CCL position depends on how you’re supplied, not on who owns the building. If your charity is the named party on the energy contract, you can submit the qualifying use declaration and claim the reduced rates. If your energy is recharged to you by the local authority as landlord, the charity reliefs may not apply in the same way — raise the question directly with your landlord.

Does our charity qualify for reduced energy rates if we also run a trading subsidiary? Charitable energy reliefs apply to the charity itself, not to associated trading subsidiaries. If your charity and its trading subsidiary share premises and a single energy supply, you’ll need to apportion consumption between the two entities. This is a common situation and straightforwardly managed through the apportionment declaration — it doesn’t disqualify the charity portion from the reliefs.