VAT on Business Energy: When You Pay 5% Instead of 20%
Most business gas and electricity is charged 20% VAT, but many sites qualify for the reduced 5% rate – and from 1 October 2026 qualifying electricity drops to 0%. Here is who qualifies and how to claim it.
VAT on Business Energy – VAT is one of the largest lines on a business energy bill, yet it is also one of the least questioned. Most businesses pay the standard 20% rate without asking whether they should. A significant number qualify for the reduced 5% rate, and some are being overcharged simply because nobody has checked.
Update: VAT on electricity drops to 0% from 1 October 2026
On 21 July 2026 the government announced that VAT on domestic electricity will fall from 5% to 0% between 1 October 2026 and 31 March 2027, worth roughly £45 a year on a typical household bill. Whether it runs beyond March will be decided at the Autumn Budget.
Three things matter for business energy:
> Electricity only. Gas is not included. Qualifying gas supplies stay at the 5% reduced rate.
> It follows the reduced rate, not the standard rate. Supplies already charged at 5% move to 0% for electricity: low-usage sites under the de minimis limits, registered charities, residential care homes and qualifying mixed-use premises. Standard-rated 20% business electricity is unaffected.
> It only puts money back if you cannot reclaim it. A VAT-registered business already recovers the 5% as input tax, so the cut is broadly neutral. The Treasury names the real beneficiaries as small businesses that qualify for the relief but are not VAT registered, along with charities and residential care homes.
Great Britain only. EU VAT rules still apply to electricity in Northern Ireland, so the rate there remains 5% and the Executive receives equivalent funding instead.
All of which makes the rest of this guide more valuable, not less. Qualifying for the reduced rate is what gets you to 0% in the first place.
The two rates
Business gas and electricity are charged at the standard VAT rate of 20%. A reduced rate of 5% applies in three main situations:
> Low usage (the de minimis limits): if your site uses no more than 33 kWh of electricity per day (around 1,000 kWh a month) or 145 kWh of gas per day (around 4,397 kWh a month), the whole supply is automatically charged at 5%. From 1 October 2026 a qualifying electricity supply drops to 0%; gas stays at 5%.
> Non-business or charitable use: premises used for a non-business purpose, and registered charities, can qualify for 5% on the qualifying proportion, and 0% on electricity from 1 October 2026.
> Domestic use: premises wholly or partly used as a dwelling, for example a flat above a shop, or care and residential settings. The same 0% electricity rate applies to the qualifying share.
The CCL link most businesses miss
If your usage falls below the de minimis thresholds, you not only get the 5% VAT rate, you are also automatically exempt from the Climate Change Levy (CCL). So a low-usage site sitting on 20% VAT is being overcharged twice, once on the VAT itself and once on a levy it should not be paying at all. Small offices, seasonal premises, storage units and unoccupied sites are the usual candidates.
The VAT declaration certificate
Where a site has mixed use, part business and part domestic or charitable, you claim the reduced rate on the qualifying share by giving your supplier a VAT declaration certificate. If 60% or more of the supply is for a qualifying use, the reduced rate applies to the entire supply. Suppliers do not apply this automatically, you have to declare it, and claims can usually be backdated up to four years.
The takeaway
VAT and CCL are supplier-collected, government-set charges, so there is no negotiating the rate itself. What you can do is make sure you are on the correct rate for how the site is actually used. It is one of the quickest wins on a business energy bill and one of the most commonly missed. With the electricity rate going to zero on 1 October, a site sitting on 20% when it should be on the reduced rate now has more to lose, not less. It is also just one line among many in the non-commodity part of your bill that rewards a proper review.
Chris Hurcombe is Managing Director of Catalyst Commercial Services, an independent business energy consultancy based in Birmingham. He works with UK businesses on energy procurement, contract management, and carbon strategy, and writes on energy markets, compliance, and the commercial implications of the UK's net zero transition.
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