VAT, or value-added tax, is a government levy on goods and services you purchase, including gas and electricity. Both households and businesses pay VAT on the energy they buy, although at different rates. But what rate do they pay exactly?
The standard VAT rate in the UK is 20%. However, domestic gas and electricity are charged at a reduced VAT rate of 5%. This 5% charge is automatically applied to your energy bills and paid to your supplier, which will then hand it over to HMRC.
Businesses usually pay the standard VAT rate of 20% on their energy bills, a cost automatically added to their bills by their suppliers. While your energy bills count as business-to-business purchases, you can’t claim back the VAT you pay on them.
However, some businesses can qualify for a reduced VAT rate of 5%, depending on what they do and how much energy they use.
A business might qualify for the reduced rate if:
It’s a charitable or non-profit organisation, meeting the legal definition of a charitable organisation. The business will need to supply evidence that it is a charity, such as its Charity Commission registration number or a letter from HMRC confirming it’s entitled to VAT relief.
Some of its energy is used for domestic purposes, for example in a care home, children’s home, or self-catering holiday accommodation. If 60% or more of a business’s energy is used for domestic purposes, the 5% reduced rate applies to its entire energy bill. However, if less than 60% of the energy goes toward domestic purposes, just that portion is charged 5% and the rest of the consumption is charged 20% VAT.
It consumes a low amount of energy, defined as, on average, less than 1,000kWh of electricity each month (or less than 33kWh/day) and less than 4,397kWh of gas each month (or less than 145kWh/day).
To register your business for the discounted VAT rate, contact your energy supplier and ask for a VAT Declaration form. You can also use this form to claim back a rebate for any overpayments of VAT on energy bills for the previous four years, either from your energy supplier or HMRC.
