Business energy VAT rates

VAT is normally charged at 20% on business energy. But in certain circumstances a business energy customer can qualify for a reduced VAT rating and only needs to pay the domestic rate of 5%.

Man calculating VAT on business energy


Should I pay VAT on business energy?

Value Added Tax (VAT) on energy covers all electricity and gas used for business purposes. And despite it being a business-to-business transaction, VAT on business electricity and gas can’t be claimed back.

The cost is automatically added as VAT on energy bills for business. Because most businesses in the UK are subject to business energy VAT at 20%, your supplier will assume that your business has to pay it too.

Compare business energy quotes

Compare now

You will pay VAT at 20% on your business gas and electricity bills, unless:

  • You qualify for a reduction
  • Your premises qualify as ‘mixed use’
  • Your business qualifies under what’s called ‘de minimis’.

How do I find out my business energy VAT rates?

The simplest way to find out your business energy VAT rates is to check your latest commercial gas and electricity bills.

The main figure on your bill will show the amount you owe for the current billing period. This figure will be inclusive of VAT. Just above that should be a slightly lower figure, which is the amount you owe, excluding VAT, and the amount of VAT you’re due to pay for that billing period should also be shown as a separate figure.

You can then use these figures to work out your business energy VAT rates – if it’s 20% of the total, you’re on the standard rate, if it’s 5% then you’re on the reduced rate.

Could my business be exempt from paying VAT on energy?

No business can be exempt from paying VAT on energy, but some can qualify to pay VAT at the reduced rate of 5%.

Which businesses qualify for reduced VAT on business energy?

Charities and non-profit companies qualify for the reduced VAT rate of 5%, even if they charge for some of their services. These activities are considered to be ‘non-business’ and will still qualify for the reduced rate.

As well as charities and non-profit companies, businesses which are used as a dwelling or residential accommodation also qualify for the reduced rate. This doesn’t apply to hospitals, prisons or similar institutions, but does include:

  • Children’s homes
  • Homes providing care for –
    • The elderly or disabled

    • People with a past or present dependence on alcohol or drugs

    • People with a past or present mental disorder

  • Hospices
  • Institutions that are the main residence of at least 90 per cent of their residents
  • Monasteries, nunneries and similar religious communities
  • School and university residential accommodation for students or pupils
  • Self-catering holiday accommodation.

‘Mixed use’ premises

‘Mixed use’ refers to businesses that use their premises for a variety of purposes.

You’ll qualify for the 5% business VAT rate if the majority of your energy usage (at least 60%) is for dwelling or residential accommodation . You can see examples of these businesses in the above section.

Charities and non-profit companies qualify for the reduced VAT rate of 5%, even if they charge for some of their services. These activities are considered to be ‘non-business’ and will still qualify for the reduced rate.

Otherwise you’ll pay the 5% rate on the proportion of your business that’s used for dwelling or residential accommodation. You’ll then pay the full 20% VAT rate on the proportion of energy which doesn’t qualify.

For example, let's say 50% of your business premises is used as a care home and 50% for administration or offices. You'll receive an energy VAT reduction for the part of your building being used as a care home.

What’s more, as well as being eligible for this discounted rate, businesses, charities and other non-profit organisations like these are often exempt from other charges. For example, you might be exempt from the Climate Change Levy, which could reduce your energy bills by approximately 20%.

Can I apply for reduced VAT on business energy?

If your business qualifies for the reduced 5% VAT rate through the list of exemptions, you’ll have to fill out a VAT declaration certificate for both your gas and your electricity supplier. Each supplier will normally have their version available on their website.

We’ve already looked at some of the criteria for businesses qualifying for a reduced rate – such as what industry your business operates in and what is done on your premises. And businesses with energy usage below what is known as the ‘de minimis’ level will also be considered for the reduced 5% VAT rate.

If your business qualifies through 'de minimis' then the 5% rate will automatically be applied to your bill.

What is the ‘de minimis’ business energy VAT rate?

Domestic energy usage is below a set level. This has become known as the ‘de minimis’ level.

If a customer uses less electricity and gas than the de minimis level, then the energy will only attract the 5% rate of VAT. That’s regardless of whether the premises is used for business or domestic purposes.

This will normally include home offices and people who work from home, but as long as your average daily use is below 33kWh of electricity and 145kWh of gas, it includes your business. It’s measured on a monthly basis. Basically, every month you must use less than 1000kWh of electricity and 4397kWh of gas.

How does the Climate Change Levy (CCL) affect VAT?

The Climate Change Levy does affect business energy VAT, so you should make sure you are familiar with everything involved. The levy is a form of tax designed to promote energy efficiency and reduced emissions among businesses in the UK. So if you qualify for the discounted rate of VAT, you may not have to pay the Climate Change Levy.

For businesses that don’t qualify for this discount, but are committed to achieving the same levels of energy efficiency, there is a Climate Change Agreement (CCA). This agreement means you will get a reduction on tax if you agree to make certain improvements regarding your business’s energy efficiency. So, not only do you lessen your impact on the environment by lowering emissions, you decrease your consumption and lower your outgoings.

Do business energy quotes include VAT and CCL?

No, business energy quotes are usually exclusive of VAT and CCL charges, simply because some businesses are exempt from VAT and have different CCL rates.

Speak to Bionic, our business energy partner if you’d like to work out your rates with these costs added. Call now on 0800 158 5296, or get an energy quote and they'll give you a call back.

*Between February 2020 and February 2021, 10% of Confused business customers saved an average of £895 on their business energy bills.