VAT Scrapped on Electricity Bills from 1 October: What It Means for Business
VAT on domestic electricity falls from 5% to 0% for six months from 1 October 2026. Here is what it does and does not cover for business energy users. The measure known as VAT Scrapped on Electricity Bills is set to impact many households and businesses alike.
The government has confirmed that VAT on domestic electricity will be cut from 5% to 0% from 1 October 2026. It is a six-month measure, running to 31 March 2027, and the Treasury puts the cost at £850 million in 2026-27, funded by cancelling the planned Digital ID programme. A typical household saves around £45 a year against the Ofgem price cap.
Most of the coverage has been about households. The detail that matters commercially is narrower, and it is worth being precise about it.
Electricity only
Gas is not included. Domestic and qualifying gas supplies stay at the 5% reduced rate, and standard-rated business gas stays at 20%. Any saving from this measure lands on the electricity bill and nowhere else.
It moves the reduced rate, not the standard rate
Standard-rated 20% business electricity is untouched. What changes is the 5% band. Sites already charged the reduced rate go to 0% on electricity, which covers (our full guide to VAT on business energy sets out the qualifying tests in detail):
> Low-usage supplies under the de minimis limits, currently no more than 33 kWh of electricity a day
> Registered charities and premises used for a non-business purpose, on the qualifying proportion
> Residential care homes and other premises wholly or partly used as a dwelling
The Treasury’s own wording names the beneficiaries as small businesses that qualify for the domestic energy VAT relief but are not registered for VAT, alongside charities and residential care homes. That framing is deliberate. A VAT-registered business already recovers the 5% as input tax, so for most companies this is cashflow-neutral rather than a saving. Where it genuinely bites is organisations that cannot reclaim.
Great Britain only
EU VAT rules continue to apply to electricity in Northern Ireland under the post-Brexit arrangements, so the UK government cannot cut the rate there unilaterally. The rate in Northern Ireland stays at 5% and the Executive receives equivalent funding instead. Multi-site operators with premises either side of the Irish Sea should expect their bills to diverge from October.
Suppliers are expected to pass it through
The government has said it expects all suppliers to pass the full reduction on, including to customers on fixed tariffs. Fixed contracts price the commodity, not the tax, so a fixed-price deal is no barrier. It is still worth checking the October and November invoices rather than assuming.
What to do before October
The practical action is not about the cut itself, it is about being on the right rate when it lands. A site that should be on the reduced rate but is sitting on 20% was previously losing 15 percentage points on its electricity. From 1 October it will be losing 20. The gap widens.
Sites below the de minimis thresholds are also automatically exempt from the Climate Change Levy, so an incorrectly rated supply is usually being overcharged twice. Claims can generally be backdated up to four years, which makes this worth checking now rather than in the autumn.
Whether the 0% rate survives past 31 March 2027 will be decided at the Autumn Budget.
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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