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What Is the VAT Rate on Business Electricity Bills?

If you have ever looked at your business electricity bill and wondered why VAT seemed higher than expected, you are not alone. It is one of the most common questions we hear from small business owners and sole traders.

The short answer: most businesses pay 20% VAT on electricity.

But some qualify for a reduced rate of 5%. Understanding which applies to you means you can check your bills, spot errors, and make sure you are not paying more than you should.

Business owner using a calculator to work out the VAT on their business electrcity bill.

What VAT Rate Do Businesses Pay on Electricity?

The standard VAT rate on business electricity is 20%. This applies to most UK businesses, including small companies, limited companies, and sole traders. Unlike domestic electricity (charged at just 5%), business electricity is standard-rated.

But there is an exception. Some qualify for a reduced rate of 5%. Understanding which applies to you means you can check your bills, spot errors, and make sure you are not paying more than you should. This guide is based on HMRC VAT Notice 701/19.

It sounds straightforward, but these exceptions create most of the confusion. We will walk through them below.

 

When Does the 5% Reduced VAT Rate Apply?

Three main situations qualify you for the lower 5% rate:

Low electricity usage (the de minimis rule)

If your business uses less than 33 kWh per day (or 1,000 kWh per month), you automatically qualify for 5% VAT.

This is the most misunderstood rule. Many businesses do not realise they qualify. You do not need to apply or fill in forms. Your supplier should apply the rate as standard. If your usage stays below the threshold, you keep the lower rate.

HMRC sets the threshold and applies it to determine whether you are a shop, office, or home-based business. View the full HMRC rules on de minimis supplies.

Mixed use (business and domestic)

If your electricity is used partly for business and partly at home (working from home, running a small side business from a spare room), you may qualify for 5% VAT.

The exact position depends on how much is used for each purpose. It is worth checking with your supplier or accountant if this applies to you.

Charities and non-profit organisations

Some charities and non-profit organisations qualify for the reduced rate when electricity is used for non-business activities. HMRC VAT Notice 701/19 sets out the full details.


How to Check the VAT Rate on Your Business Energy Bill

Your bill should clearly show the VAT rate applied (5% or 20%) and the VAT amount charged. Note: VAT applies to both unit rates and standing charges. Most online accounts also display this.

If the rate looks wrong, contact your supplier directly. In some cases, you may need to complete a VAT declaration form to confirm your eligibility for the reduced rate. Your supplier can walk you through this.

If they have applied the wrong rate, they can usually correct it and issue a revised bill.

 

Can You Reclaim VAT on Business Electricity?

If your business is VAT-registered, you can usually reclaim the VAT you pay on electricity through your VAT return. This is true whether you are charged 5% or 20%.

Electricity counts as a business expense, provided it is used wholly or partly for business purposes. If electricity is used for both domestic and business purposes, only the business portion may be reclaimable.

Speak to your accountant if you are unsure which portion applies.

 

Compare Business Electricity Tariffs with Love Energy Savings

VAT is only one part of what you pay. Your unit rate, standing charge, and contract terms usually have a much bigger impact on your overall cost.

Some suppliers secure energy more efficiently than others. This means better pricing, regardless of whether you pay 5% or 20% VAT.

Compare live business electricity deals from multiple suppliers in one place. You might be surprised at what you could save.

 

FAQs about VAT on Electricity Bills

  • What is the VAT rate on business electricity bills?

    Most businesses pay 20% VAT on electricity. Some qualify for the reduced 5% rate if their usage is below 1,000 kWh per month, electricity is used partly for domestic purposes, or they are a qualifying charity.

  • Do businesses pay 5% or 20% VAT on electricity?

    Businesses usually pay 20% VAT, unless they qualify for the reduced 5% rate. Check your bill or speak to your supplier to confirm.

  • How do I qualify for the reduced 5% VAT rate on business electricity?

    You may qualify if your business uses less than 33 kWh per day (1,000 kWh per month), electricity is used partly for domestic purposes, or you are a qualifying charity or non-profit.

  • What is the de minimis rule for business electricity VAT?

    The de minimis rule means if your business uses less than 33 kWh per day or 1,000 kWh per month, your electricity automatically qualifies for 5% VAT. You do not need to apply. Your supplier should apply this rate as standard.

  • Can I reclaim VAT on my business electricity bill?

    If you are VAT-registered, you can usually reclaim electricity VAT through your VAT return. Learn more about business energy.

  • Can I backdate a VAT claim on my business electricity?

    In some cases, your supplier can correct VAT charges and reissue bills. This depends on your circumstances and supplier policy. Contact them to discuss your options.

  • What should I do if I have been charged the wrong VAT rate?

    Contact your energy supplier directly and ask them to review the VAT applied to your account. They can usually correct this and issue a revised bill if needed.

  • Does VAT apply to standing charges on business electricity bills?

    Yes. VAT applies to both unit rates and standing charges on business electricity.

  • What is the Climate Change Levy and how does it relate to my electricity bill?

    The Climate Change Levy is a separate environmental tax applied to business energy usage and is charged in addition to VAT and appears on your energy bill. Read the official Climate Change Levy guidance.

  • How can I reduce my business electricity costs?

    Comparing suppliers and tariffs is one of the most effective ways to lower costs. See business energy deals and compare options today.

  • How do I compare business electricity tariffs?

    You can compare live business energy deals from multiple suppliers in one place through Love Energy Savings. It takes minutes and could save you hundreds.

  • Can small businesses get cheap electricity deals?

    Yes. Many suppliers offer competitive rates for small businesses. The key is comparing early and often. Rates change, and you might be on an old deal without knowing it.