VAT on Business Electricity and Gas: Rates, Relief and Reclaims

Most businesses pay 20% VAT on their energy, but many qualify for the reduced 5% rate. Here is who pays what, how the Climate Change Levy fits in, and how to claim relief you may be owed.

VAT on Business Electricity and Gas – Value Added Tax is one of the few lines on a business energy bill that many companies never question. It sits at the bottom, it looks fixed, and most people assume there is nothing to be done about it. In fact the rate you pay depends on how much energy you use and what you use it for, and a surprising number of businesses are paying more than they need to.

Unlike domestic customers, who pay a single reduced rate, businesses can find themselves on either 20% or 5% depending on the site. Getting this wrong quietly inflates every bill, and because VAT is charged on the whole supply, the difference over a year is rarely trivial. Here is how the rules actually work.

The Standard Rate and the Reduced Rate

The default rate of VAT on business electricity and gas is the standard 20%. Most commercial supplies are charged at this level, and for a typical office, shop or industrial site it is what you will see on the invoice.

The reduced rate of 5% is the same rate domestic households pay, and it exists to protect low-consumption and non-business use. If your site qualifies, VAT drops from 20% to 5% on the energy charges, which is a straight 15 percentage point saving on that part of the bill.

The rate is applied by your supplier, not by HMRC directly, which means the responsibility for getting it right often falls on the customer to flag. Suppliers apply the standard rate by default unless they are told, or can see from your consumption, that a lower rate applies.

Who Qualifies for 5% VAT

There are two main routes to the reduced rate. The first is low usage, covered by the de minimis rule below. The second is qualifying use, which covers energy used for a charitable non-business purpose or for domestic and residential accommodation.

Premises that commonly qualify on the second route include care homes, children’s homes, student and residential accommodation, self-catering holiday lets, places of worship and the non-business activities of registered charities. If at least 60% of the energy supplied to a site is put to qualifying use, the whole supply can be charged at 5%.

These reliefs are not automatic. Where you believe a site qualifies on grounds of charitable or residential use, you must tell the supplier, because they have no way of knowing how the building is used from the meter alone.

The De Minimis Rule

Low-consumption supplies are automatically charged at 5%, regardless of what the energy is used for. This is the de minimis rule, and it catches a lot of small premises without anyone having to apply for anything.

For electricity, the threshold is an average of 33 kWh per day, or around 1,000 kWh per month. For gas, it is an average of 145 kWh per day, or around 5,000 kWh per month. If your usage sits below these limits, the supply should already be at the reduced rate.

This matters most for small shops, micro-businesses, holiday units and premises that are only lightly used. It is always worth checking a low-usage bill, because if the standard rate has been applied in error, you are overpaying month after month. Understanding every line on the invoice is the first step, and our guide on how to read your business energy bill walks through where VAT sits alongside the other charges.

VAT Is Not the Same as the Climate Change Levy

VAT is often confused with the Climate Change Levy, but they are two separate taxes that happen to appear near each other on the bill. The Climate Change Levy is an environmental tax charged per kilowatt hour of energy consumed, while VAT is a percentage applied to the value of the supply.

The two interact in a way that works in your favour if you are on the reduced rate. VAT is charged on top of the Climate Change Levy, so the levy effectively increases the base that VAT is calculated on. However, any supply that qualifies for the 5% VAT rate through low usage or domestic use is also automatically exempt from the Climate Change Levy, so a genuinely low-usage site avoids both.

Both are part of the wider stack of taxes and network costs that make up more of your bill than the wholesale energy itself. We break these down in detail through our non-commodity cost analysis, which shows exactly what each charge is doing.

How to Claim the Right Rate

If a site should be on 5% because of charitable or residential use, you claim it by completing a VAT declaration certificate and returning it to your supplier. The certificate states the proportion of qualifying use, and the supplier adjusts the rate accordingly. There is no cost to submitting one.

Where VAT has been overcharged in the past, you can usually reclaim it. Suppliers can typically backdate a corrected rate by up to four years, so a site that has been wrongly charged 20% for years may be owed a meaningful refund as well as a lower rate going forward. The precise rules are set out in HMRC VAT Notice 701/19.

The practical difficulty is that no one is going to tell you that you are on the wrong rate. It sits on the bill, correct-looking, until someone checks. That is exactly the kind of detail a proper bill review is built to catch, and it is part of any sensible energy procurement exercise.

Getting the VAT Right on Every Site

For a single small premises the sums may be modest, but across a portfolio the picture changes. Multi-site operators with a mix of offices, storage, residential and lightly-used units frequently have a handful of sites on the wrong rate, and the overpayment compounds every month it goes unnoticed.

Catalyst reviews the VAT position across your estate as part of a wider bill audit, flags the sites that should be on 5%, helps you complete the declarations, and pursues historic refunds where they are due. If you are not sure every site is on the rate it should be, ask our team for a review.

Related service: Non-Commodity Costs, how Catalyst helps businesses understand and reduce the taxes, levies and network charges hidden in their energy bills.