Electricity, gas and water are billed in arrears, sometimes quarterly, and often on estimated readings. Left alone, the utilities line in the management accounts swings from month to month for reasons that have nothing to do with usage. A simple accrual routine fixes that.
Accounts
| Account | Content |
|---|---|
| Light and heat | electricity and gas |
| Water and sewerage | water supply, sewerage and trade effluent charges |
| Accrued utilities | liability for usage not yet billed |
Manufacturers and bakeries sometimes move production energy into cost of sales so gross margin includes it. Business rates are not a utility: they belong with premises costs.
Reading the invoice
Before coding a business energy invoice, check:
- actual or estimated reading: estimated bills should be followed by an actual reading so that the cost is not misstated for months;
- the period covered, which rarely matches the calendar month;
- the climate change levy (CCL): an environmental tax on business energy. It is not VAT and is not reclaimable; it is part of the cost of energy;
- the VAT rate: business energy is normally standard-rated, but supplies below the de minimis usage limits, and supplies for qualifying charitable or residential use, can be charged at the reduced rate. If the rate looks wrong for your use, ask the supplier; do not reclaim more than was charged.
Accruing for unbilled usage
A company with a 31 March year end receives its quarterly electricity bill for January to March in late April. It estimates March’s consumption at £900 plus £180 VAT using meter readings taken on 31 March.
| Account | Debit | Credit |
|---|---|---|
| Light and heat | £900 | |
| Accrued utilities | £900 |
VAT is not accrued: it is reclaimed when the VAT invoice is received. When the bill arrives the accrual is reversed and the invoice posted in full. A meter reading photographed on the last day of the period is far better evidence than an average of last year’s bills.
Recharging tenants or group companies
If the business sublets part of its premises and recharges a share of utilities, credit the recharge to “Recharged costs” or against light and heat, and charge VAT on the recharge if the business is VAT registered and the rent itself is subject to VAT (or the recharge is a separate supply). Keep the calculation of each tenant’s share with the invoice.
Working from home
Sole traders can claim either the business proportion of home utility costs or HMRC’s simplified flat rate. Companies can pay employees a tax-free amount towards additional household costs when they must work from home; see claiming home office costs.
Monthly checks
- Compare cost per month with the same month last year; spikes usually mean a missed reading or a tariff change.
- Make sure each site has one supply contract and no duplicate direct debits after a move.
- Agree the accrual to readings, not to budget.
The mechanics of accruals are described in accruals and prepayments in the chart of accounts; premises costs are covered in rent and premises costs.