Electricity changes – going down a little – at last. 

There’s a small bit of good news for leaseholders: The rate of VAT on electricity is going down from 5% to 0% from 1st October 2026 to 31st March 2027.

The change for your own home will happen automatically if you are supplied by one of the main electricity companies. Things get a little more complex for communal suppliers in leasehold blocks of flats.The 0% rate should apply for almost all sites’ but you need to check.

Some of the electricity companies default to the 20% business rate if consumption is above a certain amount. The managing agent needs to advise it is a communal supply for residential flats and subject to the qualifying VAT rate. 

In the past some managing agents have “forgotten” to advise the utility companies that the domestic rate applies. While this rate only goes down to 0% for 6 months It’s worth checking a) if this 0% rate applies to your site and b) that you’ve only been paying 5% until now. 

The 40% residential rule. 

The VAT guidance explains that on a mixed use the domestic rate of VAT applies if no more than 40% of the communal supply is charged to non residential units. So long as this figure is met then the whole communal supply is counted as “qualifying” and charged at the lower rate. I.e. 5% now then 0% for the next 6 months then back to 5%.  

See section 3.4 of the guidance
Fuel and power (VAT Notice 701/19) – GOV.UK

What to ask your managing agent. 

Ask the agent to confirm your communal energy has been provided at the 5% VAT rate and will reduce to 0% when the new rules apply.

If you’ve been charged 20% on communal energy

If your agent is charging 20% you are very likely to have been overcharged. Retrospective adjustment for the agent is difficult/ not possible, but that’s not your problem. Your landlord is responsible for your service charge and can only charge what is reasonable as per s19 and s21 of the 1985 Landlord and Tenant Act
https://www.legislation.gov.uk/ukpga/1985/70

If your communal electricity should have been provided with a 5% VAT rate and the landlord has charged 20% the FTT should deem the excess costs unreasonable.

To be pedantic the VAT will only show in the invoices from the suppliers not in the service charges themselves. 

Fingers in the pie? 

Many managing agents buy via a utility broker which should help provide a discount. That discount should flow through to the leaseholders paying the bills. Sometimes it does but sometimes it doesn’t.

LKP first exposed an example of a supplier offering managing agents “incentive payments” of up to £250,000 over a decade ago. Finding out if your agent is passing on the discount or keeping some or all the discount as a fee for their services is difficult to uncover. In theory the agent should declare if they make a profit in practice things may not always work that way. Ask the agent to confirm if they or any related company earns a fee for the provision of communal electricity.
https://www.leaseholdknowledge.com/bungs-r-us-250000-bribes-offered-to-managing-agents/

Dark arts in property management

One of the reasons tracking utility, and indeed other costs, is often difficult is that the bills provided to the leaseholders may not be the same amount the agent pays to the supplier. What the leaseholder sees is sometimes the “retail” bill paid from the service charge account but it’s not always the price paid from the agent’s consolidation account. The Tribunal will also only see this retail bill. Whether an agent gets a bulk discount is difficult to discover. If the services come via a company related to the agent or landlord it becomes even more complex to know if there are secret commissions. 

A worked example. Sites 1-10 each have a bill of £10,000 for their communal electricity. The agent pays that money from each site’s service charge account into the agent’s own consolidation account. The agent may get a bulk discount of say 5% meaning they only pay £95,000 from the consolidation account not £100,000 or they may get a £5000 credit note later in the year which also only goes into the consolidation account. The agent should pay that money back to the service charge accounts. Some choose to keep the money themselves or it could be that the agent uses that credit to pay for their own office electricity. 

The bigger the agent the bigger the theoretical discount. The system applies to almost everything, banking, phones, agency staff, and perhaps even insurance. 

We do not know how common the discount issue is. However it could be one explanation of why the 20% VAT rate has been applied on a number of leasehold sites. Charging at the 20% VAT rate as part of a wider business contract that then attracts a discount/rebate helps add to the bottom line of the agent which most sites are unlikely to challange.