What rate of VAT is charged on business energy?
VAT on a business energy supply is charged at the standard rate of 20 per cent, on the whole invoice including the Climate Change Levy. A reduced rate of 5 per cent applies where the supply is for qualifying use, meaning domestic use or the non-business activities of a charity, or where it is small enough to fall under the de minimis limit.
Below the de minimis the reduced rate is automatic. Above it, nothing happens until you give your supplier a signed declaration of what proportion of the supply is qualifying use. The percentage printed on the bill is the result of that declaration, never a substitute for it, and the difference decides whether you also owe the Climate Change Levy.
- Standard rate on a business supply
- 20%
- The default, whatever the energy is used for. Section 29A of the Value Added Tax Act 1994 sets the reduced rate at 5 per cent.
- Electricity de minimis, per day
- 33 kWh
- An average, to one customer at any one premises. Piped gas is 145 kWh a day.
- Where mixed use tips the whole supply
- 60%
- At 60 per cent qualifying use or more the whole supply is reduced-rated. Below it, it is apportioned.
Two rates, and the test that picks between them
VAT is the last line on a business electricity or gas invoice and the only one charged on all the others. It is not a non-commodity charge set by a network operator or a scheme administrator. It is a tax, and with the Climate Change Levy it is one of only two lines on the bill set by HM Revenue and Customs.
The standard rate is 20 per cent. The reduced rate is 5 per cent, fixed by section 29A of the Value Added Tax Act 1994, which charges any supply described in Schedule 7A to that Act at that rate. Group 1 of Schedule 7A is supplies of domestic fuel or power, and it covers electricity, gas, heat, coal, coke and heating oils alike. Which rate you pay turns on the use the energy is put to and on how much of it there is, and on nothing else: not turnover, not sector, not the shape of the contract.
Qualifying use, and the supplies that get it automatically
Qualifying use means one of two things: domestic use, or use by a charity otherwise than in the course or furtherance of a business. Domestic use is a list rather than a judgement, and the list is at paragraph 3.2 of the notice: dwellings, armed forces accommodation, caravans, houseboats, homes for children, care homes, hospices, monasteries, student accommodation and self-catering holiday accommodation.
Alongside it sits the de minimis. A supply small enough is deemed to be for domestic use whether or not it is, on a limit measured per customer at any one premises rather than per meter.
- Domestic use, a dwelling or one of the residential types listed at paragraph 3.2
- Charity, use otherwise than in the course or furtherance of a business
- Small electricity, an average of 33 kWh a day, or 1,000 kWh a month, at one premises
- Small gas, an average of 145 kWh a day, or 4,397 kWh a month, being 5 and 150 therms
- Small oils and solid fuel, 2,300 litres of fuel oil, gas oil or kerosene, or a tonne of coal or coke
- An ordinary business supply, The standard rate is the default, and no relief follows from being small.
- A charity trading activity, Only non-business use qualifies, so a shop or a charged-for service does not.
- Mixed use below 60% qualifying, Apportioned across the two rates rather than tipped onto the reduced one.
- Qualifying use with no declaration, Above the de minimis the supplier has nothing to act on, so 20% stands.
- Several small supplies at one premises, The limit is per customer at any one premises, so they are not counted separately.
The declaration, and what it does and does not do
Below the de minimis nothing is required of you. Small quantity supplies are always treated as being made for domestic use, and the notice is explicit that no certificate is needed to apply the reduced rate to them. Above the de minimis, the reduced rate arrives only on a certificate you give your supplier.
That certificate names both parties and their addresses, the VAT registration number, the address of the premises and the exact percentage of the supply that is qualifying use. It carries a declaration signed by a responsible officer, with position and date, and an endorsement that the customer knows they must notify the supplier if the qualifying use changes. The supplier is required to make reasonable checks on it, so you may be asked for the calculations behind the percentage. Providing an incorrect certificate carries a financial penalty.
The 60 per cent rule
Where a premises is partly qualifying and partly not, one threshold decides whether the bill is split. If 60 per cent or more of the fuel or power is for qualifying use, the whole supply is treated as qualifying and the whole invoice is reduced-rated. Below 60 per cent, the qualifying portion is charged at the reduced rate and the rest at the standard rate.
What the percentage on the bill is not
The reduced rate of VAT and the exclusion from the Climate Change Levy are built on the same qualifying use provisions, which is why they travel together and why they are so often conflated. They are not the same thing, and neither follows from the other.
What takes a supply outside the levy is the qualifying use or the de minimis threshold, not the VAT percentage printed on the invoice. A meter billed at 5 per cent with no declaration behind it still owes the levy in full, which is set out at length in the Climate Change Levy guide. If somebody keyed 5 into a billing system without a certificate to support it, two lines are wrong rather than one.
How the amount is worked out
The arithmetic is the simplest on the bill. All of the difficulty is in picking the rate.
The standard rate unless the supply is for qualifying use or under the de minimis. Section 29A sets the reduced rate at 5 per cent.
The energy, the network charges, the policy levies and the Climate Change Levy. Paragraph 2.8 of the notice puts the levy inside the value of the supply.
Two things follow from that second term. Every extra penny of Climate Change Levy costs 1.2 pence on a standard-rated supply, and a rise in any charge below the line raises the VAT with it.
Worked through at the published rates
The de minimis is a cliff edge rather than a taper, so the useful example is two almost identical sites either side of it. The period and the consumption are assumptions; the limit and the levy rate are not.
- Days in the period, 1 July to 30 September 2026
- 92
- De minimis at 33 kWh a day, 92 x 33
- 3,036 kWh
- Site A, consumption assumed
- 2,900 kWh
- Site A, daily average, 2,900 / 92
- 31.5217 kWh
- Site B, consumption assumed
- 3,100 kWh
- Site B, daily average, 3,100 / 92
- 33.6957 kWh
Site A is inside the limit and site B is outside it, on the daily limb and on the statutory monthly one alike, which over three months is 3,000 kWh. Two hundred kilowatt hours is the whole of the difference between them, and it moves two lines.
- Site A, VAT rate
- 5%
- Site A, Climate Change Levy
- £0.00
- Site B, VAT rate
- 20%
- Site B, Climate Change Levy, 3,100 x 0.801p
- £24.83
- VAT per £100 of net charges, at 5% against 20%
- £5.00 against £20.00
Site A pays no levy, because a supply inside the de minimis is outside the Climate Change Levy as well as on the reduced rate of VAT: one qualifying test doing both jobs. Had the levy been due it would have been £23.23. The fifteen point gap in the VAT rate then applies to everything below the line, so crossing the threshold costs £24.83 plus fifteen per cent of the rest of the invoice.
Mixed use below the 60 per cent line
Where the qualifying share is under 60 per cent the supply is apportioned and the invoice carries a blended rate. The share below is an assumption; the two statutory rates are not.
The cliff is steeper than it looks. At a 55 per cent qualifying share the blended rate is 11.75 per cent; five points more qualifying use takes the whole invoice to 5 per cent. That is worth measuring properly before signing a percentage.
The zero rate from 1 October 2026
On 21 July 2026 the government announced that VAT would be removed from domestic electricity bills from 1 October 2026, taking the rate from 5 per cent to zero. It is estimated to cost around £850 million in 2026-27, to take about £45 off the yearly Ofgem price cap, and to reduce CPI inflation by around 0.10 percentage points and RPI by around 0.14.
It reaches far fewer businesses than the headline suggests, because it moves supplies that were already on the reduced rate. The announcement names small businesses that qualify for the domestic energy VAT relief and are not registered for VAT, along with charities and residential care homes eligible for the reduced rate. Guidance published on 26 August 2026 adds that those already qualifying, including through the existing VAT certificate and declaration process, get the zero rate for the winter, that it applies to fixed tariffs and prepayment top-ups, and that no action is needed.
Two groups see nothing. A business paying the standard 20 per cent is unaffected, because the measure moves the reduced rate rather than the standard one. And a VAT registered business is no better off either way, because it reclaims its input tax regardless, so the rate on the invoice is a cashflow question rather than a cost. It also applies to electricity only, so gas keeps whichever rate it was already on.
Where it appears on your invoice
VAT is always shown, because a VAT invoice has to show it. What varies is what it has been charged on, and whether the rate can be explained.
| What the line says | What to do with it |
|---|---|
| VAT at 20% | The default. Confirm the base includes the Climate Change Levy, and that the site genuinely has no qualifying use worth certifying. |
| VAT at 5% | Find the certificate. If the site is above the de minimis and nobody can produce one, the rate is unsupported and the Climate Change Levy is probably missing too. |
| VAT at 5% with no Climate Change Levy line | Consistent, and the case the paperwork exists to produce. Check the declaration is current and that the qualifying use has not changed. |
| Two VAT lines at two rates | An apportioned mixed-use supply below 60% qualifying. Check the split against the percentage on your own certificate. |
| VAT at 0% on electricity from 1 October 2026 | Only correct where the supply was already reduced-rated. A standard-rated supply zero-rated by mistake is an under-charge that comes back. |
On a pass-through contract VAT is the one line with no reconciliation to come, because there is no rate it could be at but the statutory one for the supply as declared.
How to check it
Nobody checks this line, because a percentage looks self-evidently right. Four things are worth confirming, in this order.
- The base. VAT should be charged on a total that includes the Climate Change Levy. A bill that adds the levy after the VAT has under-charged the tax, and the correction arrives later.
- The rate against the evidence. Twenty per cent needs nothing. Five per cent needs either a daily average inside the de minimis or a certificate on file with a percentage on it.
- The de minimis arithmetic. An average across the whole billed period, per customer per premises, against the limit for the fuel. A period spanning a quiet month and a busy one is tested once.
- The levy line beside it. A reduced rate with a levy still charged, or a standard rate with no levy, means one of the two is wrong. They answer to the same qualifying test.
Deep dives and edge cases
These come up often enough to answer, and not often enough to interrupt the main path.
A no-consumption bill cannot reach the reduced rate on the thresholdZero kilowatt hours is not a small supply.＋
The de minimis limb is an average daily consumption, and it needs a consumption to average. A bill stating no kilowatt hours at all, a standing-charge-only period on a de-energised supply for instance, has no consumption basis, and reading it as zero kilowatt hours a day would grant the reduced rate to every such bill.
A supply like that reaches the reduced rate only through a declared qualifying use. Absent one it stays on the standard rate, the statutory default for a non-domestic supply.
Reduced-rate VAT, a Climate Change Agreement and an EII certificate are three different thingsThey relieve three different charges, and none substitutes for another.＋
A Climate Change Agreement discounts the Climate Change Levy by 92 per cent on electricity and 89 per cent on gas. An energy intensive industries certificate removes a certified proportion of four policy levies and never touches the levy. Reduced-rate VAT changes the rate of a tax charged on everything else.
You can hold all three, and their tests share nothing but the word relief. The one genuine overlap is the subject of this guide: the qualifying use that gives the reduced rate of VAT also puts the supply outside the Climate Change Levy altogether, a stronger outcome than the 92 per cent an agreement buys.
Questions
What rate of VAT is charged on business electricity?＋
The standard rate of 20% by default, charged on the whole invoice including the Climate Change Levy. A reduced rate of 5% applies where the supply is for qualifying use, meaning domestic use or the non-business activities of a charity, or where it falls under the de minimis limit of an average 33 kWh of electricity a day, or 1,000 kWh a month, to one customer at any one premises. Piped gas has its own limit of 145 kWh a day, or 4,397 kWh a month.
What is the 5% VAT rate on business electricity, and who gets it?＋
Section 29A of the Value Added Tax Act 1994 charges VAT at 5% on any supply described in Schedule 7A, and Group 1 of that Schedule is supplies of domestic fuel or power. A business gets it in one of two ways: the supply is small enough to fall under the de minimis limit, in which case it is deemed to be for domestic use automatically, or the business declares qualifying use to its supplier on a certificate. Nothing about turnover, sector or contract type affects it.
What is the de minimis threshold for VAT on business energy?＋
For electricity it is an average of 33 kilowatt hours a day, or 1,000 kilowatt hours a month, supplied to one customer at any one of their premises. For piped gas it is 5 therms or 145 kilowatt hours a day, or 150 therms or 4,397 kilowatt hours a month. For heating oils it is 2,300 litres and for solid fuel one tonne of domestic grade coal or coke. Within those limits the supply is treated as made for domestic use and no certificate is needed.
Do I need a VAT declaration form for business energy?＋
Only above the de minimis. A supply within the small quantity limits is always treated as being made for domestic use, and VAT Notice 701/19 says no certificate is needed to apply the reduced rate to it. Above the limits the reduced rate arrives only on a certificate you give your supplier, stating both names and addresses, the VAT registration number, the address of the premises and the exact percentage of the supply that is qualifying use, signed by a responsible officer.
What is the 60% rule for VAT on fuel and power?＋
It is the threshold that decides whether a mixed-use supply is split. If 60% or more of the fuel or power supplied to a premises is for qualifying use, the whole supply is treated as qualifying and the whole invoice is charged at the reduced rate. If less than 60% is qualifying, the qualifying portion is charged at the reduced rate and the rest at the standard rate. A 45% qualifying share therefore produces a blended rate of 13.25%, while a 60% share produces 5% on everything.
Is VAT charged on the Climate Change Levy?＋
Yes. Paragraph 2.8 of VAT Notice 701/19 says the value of a supply for VAT purposes will include Climate Change Levy where appropriate, so the levy sits inside the VAT base. On a standard-rated supply every extra penny of levy therefore costs 1.2 pence. A bill that adds the levy after VAT has under-charged the tax, and that correction arrives later.
Does paying 5% VAT mean I do not have to pay the Climate Change Levy?＋
No. The two tests are built on the same qualifying use provisions, which is why they are confused, but neither follows from the other. What puts a supply outside the Climate Change Levy is the qualifying use or the de minimis threshold, not the VAT percentage printed on the invoice. A meter billed at 5% with no declaration behind it still owes the levy in full, and a percentage keyed into a billing system with no certificate to support it means two lines are wrong rather than one.
Is VAT being removed from electricity bills in October 2026?＋
The government announced on 21 July 2026 that VAT would be removed from domestic electricity bills from 1 October 2026, taking the rate from 5% to 0%. It is estimated to cost around 850 million pounds in 2026-27 and to take about 45 pounds off the yearly Ofgem price cap. As at 3 September 2026 no statutory instrument had been made for it and VAT Notice 701/19 had not been updated to mention it.
Does the 0% VAT rate on electricity apply to my business?＋
Only if your supply was already on the reduced rate. The announcement names small businesses that qualify for the domestic energy VAT relief and are not registered for VAT, along with charities and residential care homes eligible for the reduced rate. A business paying the standard 20% is unaffected, because the measure moves the reduced rate rather than the standard one. A VAT-registered business is no better off either way, because it reclaims its input tax regardless.
When does the 0% VAT rate on electricity end?＋
No end date has been published. Both the announcement of 21 July 2026 and the guidance of 26 August 2026 say only that the cut is funded for the 2026 to 2027 financial year, which ends on 31 March 2027, and that is where the end date widely quoted for it comes from. It is an inference from the funding rather than a published expiry.
Does the temporary zero rate apply to gas as well as electricity?＋
No. The measure announced is for electricity only. A gas supply keeps whichever rate it was already on, so a site holding a qualifying use declaration continues to pay 5% on its gas. Northern Ireland is also not covered by the announcement as made: EU VAT rates apply there on goods including electricity, so agreement from the EU would be necessary, and the Northern Ireland Executive receives comparable funding instead.
What rate of VAT applies to business water?＋
A different regime. Water and sewerage do not sit in Group 1 of Schedule 7A at all. Supplies of water are zero-rated under Schedule 8 to the Value Added Tax Act 1994, with an exclusion that makes water supplied to certain industrial customers standard-rated, and sewerage services are zero-rated to everybody. There is no reduced rate and no de minimis for water.
One percentage, and the paperwork behind it.
Simplest Energy resolves the VAT rate a supply is due from the declaration and the de minimis threshold, prices the line from it, and compares the result against what you were billed.
- The reduced-versus-standard decision made once for the whole bill, from average daily consumption against the effective-dated de minimis threshold for the fuel, or from a recorded declaration of qualifying use
- VAT charged on the net total including the Climate Change Levy, at the statutory rate in force or at the rate recorded against the meter
- A warning where the rate recorded on a meter differs from the statutory rate in force, naming both figures and saying which was used
- The temporary zero rate on qualifying electricity from 1 October 2026 as a dated statutory class, which today has to be recorded as a rate against the meter
- The monthly limb of the de minimis, which today is evaluated on the daily limb alone
- Apportionment of a mixed-use supply below 60% qualifying use across two rates on one bill
Built from the primary document.
Fuel and power (VAT Notice 701/19)
Value Added Tax Act 1994, Schedule 7A, Group 1: supplies of domestic fuel or power
Value Added Tax Act 1994, section 29A: reduced rate
VAT rates
New PM cuts tax on household electricity bills to give breathing space on cost of living
Breathing space on your energy bill
Climate Change Levy rates
- Last reviewed
- 3 September 2026
- Technical basis
- Fuel and power (VAT Notice 701/19), last updated 5 February 2025; Group 1 of Schedule 7A and section 29A of the Value Added Tax Act 1994 on legislation.gov.uk; the GOV.UK VAT rates guidance; the GOV.UK announcement of 21 July 2026 and the guidance of 26 August 2026 on removing VAT from electricity bills; and the HMRC Climate Change Levy rates table, last updated 27 November 2025. All checked 3 September 2026, at which date no statutory instrument had been made for the zero rate
- Review trigger
- A statutory instrument or Finance Act implementing the temporary zero rate on electricity, or an announcement extending or ending it; a revision to VAT Notice 701/19; or a change to the standard rate, the reduced rate, or the de minimis limits in Group 1 of Schedule 7A to the Value Added Tax Act 1994.
This guide explains how VAT on a business energy supply is rated, declared and calculated. It is not tax, legal or accounting advice, and the rates and limits quoted are those published at the date of review. Check the linked source before relying on a figure, and contact HMRC or your accountant if your circumstances are unusual.