What is business energy VAT, and why are you probably paying 20%?
Business energy VAT is the value added tax added to your company’s gas and electricity bills, and by default it’s charged at the standard rate of 20%. Most businesses pay that 20% without a second glance, because the bill doesn’t exactly invite one.
Here’s the catch. A large share of smaller businesses actually qualify for a reduced rate of 5%, the same rate households pay, but a supplier can’t apply it until you tell them you’re eligible. So the money sits on your bill, quarter after quarter, until someone asks for it back.
That’s the do nothing tax in a sentence. Nobody at HMRC or your supplier is going to volunteer the lower rate for you. This guide covers who qualifies, how to claim, and the second charge sitting further down the bill, the Climate Change Levy. For the wider picture of how a bill is built, our guide to understanding UK energy tariffs is a good starting point. All figures checked July 2026.
The 5% reduced rate on business energy VAT: who qualifies
Two main routes get your business energy VAT down to 5% rather than 20%.
Low usage, the de minimis rule. If your electricity or gas use stays under a set daily average, HMRC treats the whole supply as domestic and the entire bill drops to 5%. You don’t have to split anything or prove much beyond the usage.
Domestic or charitable use. If at least 60% of your energy goes to a dwelling or to a charity’s non business activity, the qualifying part gets 5%. Care homes, student accommodation and self catering holiday lets often land here.
The de minimis thresholds are fixed national figures, not something a supplier decides:
| Fuel | De minimis threshold (whole supply at 5%) | Rate above the threshold |
|---|---|---|
| Electricity | Up to 33 kWh per day (about 1,000 kWh a month) | 20% |
| Gas | Up to 145 kWh per day (about 4,397 kWh a month) | 20% |
Source: HMRC, VAT Notice 701/19 on fuel and power, checked July 2026. Stay under the threshold and the full bill is charged at 5%. Go over it and the part above domestic use is charged at 20%, though the domestic use route can still bring you back to the reduced rate.
A small shop, salon or office using well under those thresholds can move the whole bill from 20% to 5% business energy VAT. What that’s worth depends entirely on what you spend. The rate cut itself is real though, and it’s yours to claim rather than something a supplier hands over.
How do I claim the reduced VAT rate on business energy?
You claim the reduced rate by sending your supplier a VAT declaration certificate, and it takes a few minutes rather than an accountant. The reduced rate is never applied automatically, so until that form reaches your supplier you keep paying 20%.
- Check your latest bill for the VAT rate you’re being charged. It’s usually printed near the totals.
- Work out your usage against the de minimis thresholds above, or whether 60% or more of the supply is domestic or charitable.
- Ask your supplier for a VAT declaration form, most have one online, and return it for each qualifying meter.
- If you’ve been overcharged, ask for a backdated refund. Suppliers can normally go back up to four years, in line with the limit HMRC allows.
One quiet bonus comes with it. Qualifying for the 5% rate usually means you’re also exempt from the Climate Change Levy, which brings us to the next line on the bill. The full detail lives in HMRC’s VAT on fuel and power notice.
The Climate Change Levy: the other charge on your bill
Your business energy VAT rate isn’t the only charge worth a second look. The Climate Change Levy (CCL) is an environmental tax charged on each unit of gas and electricity most businesses use, sitting on top of your unit rate.
From 1 April 2026 the main rate is 0.801 pence per kWh for both electricity and gas, according to the government’s published rates. It rises again to 0.827 pence per kWh from 1 April 2027.
Across a year that adds up, but there’s good news for smaller firms. If you qualify for the 5% reduced VAT rate through the de minimis or domestic route, you’re automatically excluded from the CCL as well. One form, two charges dealt with.
Businesses with a Climate Change Agreement, meaning energy intensive sectors that hit efficiency targets, can claim a further reduction, up to 92% on electricity and 89% on gas, per the government’s published Climate Change Levy rates. For most SMEs, the de minimis exemption is the realistic route.
Out of contract rates: where the bigger money leak usually is
VAT and the levy are worth fixing, but for many firms the largest overpayment hides somewhere else, in the rate you pay when there’s no contract in place.
When a fixed deal ends and you don’t renew or switch, your supplier moves you onto out of contract or deemed rates. These aren’t capped the way household prices are, and they sit well above a negotiated fixed rate. Industry guides in 2026 put deemed unit rates a good deal higher than typical fixed quotes, though the exact gap depends on your supplier, meter and usage. If you’re not sure when your deal ends, our guide to business energy contracts explains the renewal window.
The fix is the same one that sorts the VAT. Don’t leave it sitting on the default. You can leave a deemed contract with about 28 days’ notice, because no fixed term is holding you, so comparing and switching is usually the fastest saving on the table. Any figure you save depends on your own usage and the deal you move to. If you’d rather someone negotiate for you, weigh up the new rules on business energy brokers first.
Business energy VAT: the quick version
- The default rate is 20%, but low usage, or mainly domestic and charitable use, can bring it down to 5%.
- Electricity under about 33 kWh a day, or gas under about 145 kWh a day, means the whole supply qualifies for 5%.
- You have to claim it with a VAT declaration form; it’s never applied automatically.
- Qualify for 5% and you’re usually exempt from the Climate Change Levy as well.
- The biggest saving is often leaving out of contract rates behind for a proper fixed deal.
Not sure which of these apply to you? It’s worth a five minute check. You can compare business energy deals to see what a fixed contract would cost, then send your supplier a VAT declaration to get your business energy VAT down to the reduced rate. For what it’s worth, Switcheroo is rated 4.45/5 on Reviews.io.
Frequently asked questions about business energy VAT
- Is VAT on business energy 5% or 20%?
- It’s 20% by default. You pay 5% if your usage falls under the de minimis thresholds, or if at least 60% of the supply is for domestic or charitable use. You have to declare eligibility to your supplier before they can apply it.
- Can I claim back overpaid business energy VAT?
- Usually yes. If you were eligible for the 5% rate but charged 20%, suppliers can normally backdate a refund up to four years, in line with the limit HMRC allows. Ask your supplier once your declaration is in.
- Do I pay the Climate Change Levy if I’m on the 5% VAT rate?
- No. Businesses that qualify for the reduced 5% VAT rate through the de minimis or domestic route are exempt from the Climate Change Levy automatically.
- What is the Climate Change Levy rate for 2026?
- From 1 April 2026 the main rate is 0.801 pence per kWh for both electricity and gas, per the government’s published rates. It’s due to rise to 0.827 pence per kWh from 1 April 2027.
- Does switching supplier change my VAT rate?
- No. VAT eligibility follows your usage and premises, not your supplier, so you’ll need a fresh declaration with a new supplier. Switching mainly changes your unit rate and standing charge, which is where most of the saving sits.
