VAT on business electricity: rates and rules

Understanding the Value Added Tax (VAT) applied to business electricity bills can be complex. While the standard rate is 20%, many businesses may qualify for reduced rates of 5% or even a temporary 0% under specific conditions. Knowing these rules is crucial to ensure correct payments and identify potential savings.

At Fuse Energy, we believe in making energy simple and transparent for everyone. While Fuse Energy currently supplies residential energy only, businesses interested in future commercial offerings can join a waitlist on our website to stay informed.

Understanding VAT rates on business electricity

The VAT rate your business pays on electricity depends on several factors, primarily your consumption levels and how the energy is used. Most businesses pay the standard rate, but specific exemptions can lead to significant savings.

Standard 20% VAT rate

Most UK businesses pay the standard VAT rate of 20% on their electricity supplies. This rate applies by default to commercial premises unless specific criteria for a reduced rate are met. This includes the entire bill, encompassing both the unit rate and the standing charge.

Reduced 5% VAT rate

A reduced VAT rate of 5% applies to business electricity under certain conditions. This rate is typically for businesses with low energy consumption, those with domestic or residential use, or qualifying charitable non-business use. For gas, the reduced rate remains at 5% for qualifying use.

Zero-rated 0% VAT

A temporary 0% VAT rate applies to qualifying electricity supplies in Great Britain (England, Scotland, and Wales) from 1 October 2026 to 31 March 2027. This measure applies to electricity that would otherwise qualify for the 5% reduced rate, meaning the eligibility rules themselves have not changed. After 31 March 2027, the rate is expected to revert to 5% for these qualifying supplies. Electricity in Northern Ireland that qualifies for a reduced rate remains at 5%.

Eligibility for reduced VAT: the de minimis rule

The "de minimis" rule is a key provision that allows businesses to qualify for the reduced 5% (or temporary 0%) VAT rate based on their energy consumption.

What is the de minimis rule?

The de minimis rule states that if a business consumes less than a certain amount of energy, HM Revenue & Customs (HMRC) treats the supply as domestic in scale, making it eligible for the reduced VAT rate. This rule aims to align the tax treatment of low-usage business supplies with that of domestic supplies.

For electricity, the de minimis threshold is an average of 33 kilowatt-hours (kWh) per day, or approximately 1,000 kWh per month. For gas, the threshold is 145 kWh per day, or around 4,397 kWh per month. These thresholds apply per individual supply or premises, not per business as a whole.

Calculating your business's eligibility

To determine if your business qualifies under the de minimis rule, you need to monitor your average daily or monthly energy consumption. Divide the kWh billed by the number of days in the billing period to get your average daily usage. If this figure consistently falls below the 33 kWh per day (or 1,000 kWh per month) for electricity, your supply should qualify.

Applying the reduced rate

If your business falls within the de minimis thresholds, the reduced rate should be applied automatically by your supplier. You typically do not need to apply or fill in forms for this specific qualification. However, if your bill shows 20% VAT despite meeting the de minimis criteria, you should query it with your supplier.

VAT for charities and non-profit organisations

Charities and non-profit organisations can often benefit from reduced VAT rates on their energy bills, particularly for activities that are not considered business-related.

Charitable non-business use

Charities pay 5% VAT on fuel and power used for non-business activities. This includes energy used for purposes where no charge is made, such as free daycare for disabled people. From 1 October 2026 to 31 March 2027, qualifying electricity for charitable non-business use in Great Britain is zero-rated.

To receive the reduced rate, charities usually need to provide a valid VAT declaration certificate to their energy supplier, certifying the percentage of energy used for qualifying purposes.

Mixed-use properties

If a charity's premises are used for both qualifying non-business activities and non-qualifying business activities, the VAT treatment can be split. If 60% or more of the fuel or power is for qualifying use, the entire supply can be treated as qualifying and charged at the reduced rate (5% for gas, or temporarily 0% for electricity). If less than 60% qualifies, VAT should be charged at the reduced rate on the qualifying portion and the standard 20% rate on the non-qualifying portion.

How to apply for charity relief

Charities should contact their energy supplier to declare their eligibility for reduced VAT. This typically involves submitting a VAT declaration form. It is important to be specific about the proportion of energy used for non-business activities to ensure the correct rate is applied.

Reclaiming VAT on business electricity bills

Even if your business pays the standard 20% VAT rate, you may be able to reclaim it, provided you meet certain conditions.

Who can reclaim VAT?

A VAT-registered business can generally reclaim the VAT it pays on electricity as input tax, provided the electricity is used for taxable business purposes. This means the VAT paid on energy can be offset against the VAT charged on your sales, reducing your overall VAT liability. If you are not VAT-registered, the VAT on your energy is a real cost.

The VAT reclaim process

Reclaiming VAT on energy bills follows the standard VAT reclamation process through your regular VAT return submitted to HMRC. You will need to keep accurate records, including copies of your energy bills showing the VAT charged, and evidence that the electricity was used for taxable business purposes.

Common reclaim challenges

One common pitfall is incorrectly applying the standard 20% VAT rate when eligible for a reduced rate. Businesses may also fail to reclaim eligible VAT due to a lack of awareness or perceived complexity. HMRC requires businesses to maintain robust processes and documentation to support all VAT claims, as automated compliance tools are becoming more prevalent.

Ensuring correct VAT application and compliance

Proactive management of your business electricity VAT can prevent overpayments and ensure compliance with HMRC rules.

Checking your energy bills

Regularly check your energy bills to ensure the correct VAT rate has been applied. If your consumption falls below the de minimis thresholds or your business qualifies for charitable non-business use, verify that the 5% (or temporary 0%) rate is reflected.

What to do if overcharged

If you believe you have been overcharged VAT, contact your energy supplier. Suppliers can claim overpaid VAT back from HMRC for up to four years, and you can request a refund for this period. Your supplier should apply the correct VAT rate from the date they receive a valid VAT certificate, where required.

Staying compliant with HMRC rules

To stay compliant, businesses must provide accurate information to their energy supplier regarding their VAT status and energy usage. Maintaining meticulous records of all energy bills and VAT paid is essential for reclaim purposes and can help prevent issues during a VAT inspection. It is advisable to consult a tax professional for individual circumstances, as this guide provides general information and not specific tax advice.

While Fuse Energy currently focuses on providing clear, actionable guidance and energy supply for residential customers, we understand the importance of managing energy costs effectively. We aim to bring the same transparency and simplicity to future commercial offerings. Businesses interested in our future commercial energy solutions can join our waitlist on our website.