Background:
Our halls and community buildings provide essential services to local residents, contributing to their health and wellbeing and strengthening community cohesion. As well as the current inflationary pressures on energy costs, fuel bills are significantly inflated by paying VAT at the business level of 20%. This does not reflect how our facilities operate and has a serious impact on our finances and ability to invest in energy efficiency works, which would help address the problem.
HMRC guidance requires charities to pay VAT on supplies of fuel and power at either 5% or 20%, depending on how the premises are used. The system inherited from before Brexit is that while small energy supplies (i.e. for small and less well-used halls) are treated as ‘domestic’ and pay 5% VAT, energy supplies for larger and better-used halls, or those which only use one type of fuel (usually electricity), face a more complex VAT regime which means they incur 20% VAT. This VAT cannot be reclaimed because ironically, larger halls are still too small to register for VAT.
The problems:
Although in theory the reduced 5% rate is supposed to apply when fuel is used for *qualifying purposes, many community buildings do not meet the strict criteria for this relief. This is because regular hall hire, even when offered at a non‑commercial rate for use by local community groups, is classified as business use.
A hall’s main charitable purpose is to provide space for community activities, and yet this is categorised as business use under the relief rules. To receive the 5% VAT rate halls are required to demonstrate a threshold of 60% qualifying use, which it is often not possible to do.
Although charitable community buildings are allowed to apportion their usage between qualifying (5%) and non-qualifying (20%) uses, and provide suppliers with a certificate declaring this, this is cumbersome and time-consuming for volunteers and use changes year on year. And each time a hall changes their energy supplier in search of a better tariff they must go through the same routine.
Even when energy use falls below the de minimis threshold for treatment as a domestic supply (for example, electricity usage not exceeding 1,000 kWh per month), the billing systems used by energy suppliers do not marry up. For example, they often assess consumption per billing period rather than annually so that a building that qualifies over a full year is still charged 20% during winter months when usage temporarily increases. This means that even when energy consumption falls in the summer months, halls can still pay 20% for the whole year. Some suppliers attempt to correct this by granting “charity status”, but unfortunately this is inconsistent across the sector and depends entirely on the company’s own policies.
These complications place unnecessary administrative and financial strain on community hall charities that operate with limited resources, and deliver vital social, educational, and wellbeing services to residents, not to mention hosting MP and local councillor surgeries and acting as polling stations.
At a time when many community buildings are facing cost pressures, with the prospect of even higher energy prices on the horizon, having clarity and fairness in VAT treatment would provide meaningful support. It would also help halls to build reserves so that they can invest in improving their energy efficiency and reduce the hall’s carbon footprint.
If your hall is affected by this and you would like to do something about it, please ask your MP to raise it with HM Treasury and HMRC. We have a template letter that you can use. The letter asks for:
- A review of the classification of community hall hire, so that genuinely charitable, low‑cost community activity is not treated as “business use” for VAT purposes, and instead all charitable community buildings qualify for the 5% VAT on fuel and power
- Continuation of the zero rate of VAT on energy saving materials for charitable village and community halls when it expires in March 2027.
- It would be good if all energy companies were obliged to provide a simplified and consistent process for community buildings to apply for the reduced VAT rate, for example automatically applying the 5% rate for the 6 summer months of May to October and assessing annual usage when determining the applicable VAT rate, rather than looking at individual months.
We appreciate that the Treasury is facing huge financial pressures, but these changes are long overdue, would have minimal Budgetary implications, widespread benefits and would ensure that energy taxation policy supports, rather than undermines, the work done by volunteers running these essential community assets.
Please contact Tessa Hall, Community Halls Adviser email: [email protected] if you would like a letter template to send to your MP.
You can read more about Qualifying and non-qualifying purposes, business use and non-business use and de minimis thresholds in ACRE’s Information Sheet 26 Coping with VAT on fuel and power supplies. It provides details of how to calculate the present business and non-business use of a village hall. In brief, hirings for private events or commercial use and fund-raising activities such as the provision of catering or refreshments are treated as business uses. Use for which no hire charge is made, or a voluntary donation is made is non-business.
Relevant VAT notices:
Fuel and power (VAT Notice 701/19) – GOV.UK
How VAT affects charities (VAT Notice 701/1) – GOV.UK