A Business Owner’s Guide To VAT On Commercial Energy

VAT is often a sneaky, easily overlooked addition to your commercial energy bill. For UK business owners, however, understanding how VAT works isn’t just about compliance; it could be the key to unlocking thousands of pounds in potential savings every year.

Despite this, many companies, especially small and medium-sized businesses, still overpay or miss out on reduced rates, exemptions, or backdated refunds. Why? Because the VAT system on energy bills can feel needlessly complicated, full of jargon, and unclear rules.

This guide strips away the confusion and lays it all out in plain English, from who pays VAT and when, to how to secure relief, reclaim overpayments, and make sure you’re not paying a penny more than you should.

What Is VAT on Business Energy? 

VAT (Value Added Tax) is a charge applied to nearly all goods and services sold in the UK, including electricity and gas for businesses. The standard rate for business energy VAT is 20%, but that’s not the whole story.

Your supplier adds VAT to your bill based on:

• Energy usage
• Standing charges
• Climate Change Levy (if applicable)
• Other associated fees

For many businesses, this VAT is recoverable. But if you're not VAT registered or unaware of available reliefs, you could be paying more than necessary.

Who Has To Pay VAT on Energy? 

Most businesses in the UK will pay VAT on their energy usage. This includes:

• Limited companies and partnerships
• Sole traders operating from commercial premises
• Charities (if using energy for business activities)
• Farms, factories, and workshops
• Offices, restaurants, hotels, and retailers

If your business uses energy solely for commercial activities, you’re likely being charged the full 20%.

When You Can Pay a Reduced VAT Rate 

Your business could be eligible for a reduced VAT rate of 5% instead of the standard 20% if it meets specific criteria outlined by HMRC. This reduced rate isn’t applied automatically, so it’s important to know the qualifying conditions and take action if they apply to you.

You may qualify if:

1. Low Energy Usage 

If your monthly usage is:

• Below 1,000 kWh of electricity, or
• Below 4,397 kWh of gas

You’re eligible for the reduced rate under the de minimis rule.

2. Mixed-Use Premises 

If your business premises are used partly for domestic or charitable purposes (more than 60%), you may qualify for a reduced rate on the entire supply.

3. Charities 

Charities using energy exclusively for non-business or charitable purposes can receive the reduced 5% rate even if they're VAT registered.

What Is the De Minimis Rule? 

The de minimis rule allows small businesses to be charged VAT at the reduced 5% rate due to low energy consumption.

Here’s how it works:

• Electricity: Use less than 33 kWh per day (approx. 1,000 kWh/month)
• Gas: Use less than 145 kWh per day (approx. 4,397 kWh/month)

Example:
A small retail shop using a single till and LED lighting might fall below the threshold and qualify for the reduced rate. Your supplier will need to review usage levels to apply the discount.

📌 Tip: Your supplier might not proactively apply this unless you request it.

How To Apply for VAT Relief as a Charity 

Charities aren’t automatically given VAT relief; they must actively apply for it. If your organisation qualifies, it’s important to follow the proper steps to ensure the reduced rate is applied to your energy bills. Here’s how to do it:

Step 1: Confirm Eligibility

Make sure your energy use is for:

• Residential accommodation (e.g., care homes, hospices)
• Religious worship
• Free charitable services (e.g., food banks)

Step 2: Complete a VAT Declaration Form

Available from your supplier’s website. You’ll need to:

• Declare that the energy is for charitable/non-business use
• Provide your charity registration number
• Sign and return the form

Step 3: Submit It

Email or post the completed form to your supplier. If accepted, they’ll apply the reduced rate and may issue a refund for overpaid VAT up to four years back.

How To Check Your VAT Rate 

Check your energy bill carefully for a line item showing the VAT rate applied. You’ll typically find this near the bottom of the invoice, just before the final total. It should clearly state whether you’ve been charged 5% or 20% VAT.

If you're unsure why a specific rate has been applied or if you believe it's incorrect, don’t hesitate to contact your supplier for clarification. They can explain the basis for the rate and whether your business may qualify for a reduced rate.

Also, take a moment to review previous energy bills. If you've been consistently charged 20% but now realise you may have qualified for the 5% rate, you could be eligible for a refund. Businesses can typically reclaim overpaid VAT going back up to four years.

How To Claim VAT Relief on Business Energy 

Step 1: Download a VAT Relief Form

You can usually find the VAT relief form on your energy supplier’s website, often within their business support or help sections. If it’s not readily available online, you can request a copy directly by phone or email. Most suppliers are familiar with the process and can guide you on exactly what’s needed.

Step 2: Fill It Out

When completing the VAT relief form, you’ll need to provide essential details about your business, including your name, address, and VAT registration number (if applicable). If you’re applying under the low usage or mixed-use premises criteria, you should also include a brief usage statement explaining how your energy is consumed. In most cases, you’ll also need to attach supporting documents, such as proof of charitable status or recent energy bills, to validate your claim.

Step 3: Return the Form

Once your completed form has been submitted and reviewed by your supplier, they’ll update your VAT rate accordingly on future bills. If your business qualifies, they may also issue a backdated refund for overpaid VAT, typically covering up to the past four years. This can result in a significant financial boost, especially for small businesses or charities that have unknowingly been charged the full 20% rate.

What About VAT on Green Energy and Renewables? 

Switching to green energy doesn’t exempt you from VAT. Even if your business is purchasing 100% renewable electricity or carbon-neutral gas, VAT is still charged either at the standard 20% rate or the reduced 5% rate, depending on your energy usage and eligibility under the standard relief criteria.

Solar Panels and Renewable Installations 

If you're installing solar panels, heat pumps, or other renewable energy systems for use in a domestic setting or for charitable purposes, these may attract a reduced VAT rate under specific government schemes designed to promote sustainability.

However, if you’re installing these systems for commercial use, the standard 20% VAT applies, unless your usage falls within low energy thresholds or you qualify under the mixed-use or charitable relief rules.

♻️ Important Note: The source of your energy (renewable or not) does not automatically affect the VAT rate. Eligibility for VAT relief is based on usage type, not energy origin.

Breakdown of a Sample Business Energy Bill with VAT 

With Reduced VAT (5%): VAT drops to just £67.50.

Is My Energy Usage Classed as Business or Domestic? 

If you're operating from:

• A flat above a shop
• A home office or farm
• A property with living and working spaces

...then your premises might be classed as mixed-use.

How to determine:

• Estimate % of energy used for business vs domestic
• If more than 60% is for domestic/charitable, full supply qualifies for 5%
• If less than 60%, then only the domestic portion gets 5% the rest is charged at 20%

How VAT on Business Energy Differs from Domestic Energy

Domestic users pay less VAT, but business users can reclaim it if they know how.

Common VAT Mistakes to Avoid 

• Assuming 20% is always correct
• Failing to check low-usage eligibility
• Not submitting a VAT declaration form
• Not reclaiming overpaid VAT retroactively
• Not separating business vs personal usage in mixed setups

Can You Reclaim VAT on Energy Bills? 

If your business is VAT registered and uses energy for commercial purposes:

✅ Yes, you can reclaim it on your VAT returns.

But you cannot reclaim VAT if:

• You’re not VAT registered
• You use the energy primarily for domestic or charitable use
• You don’t have valid VAT invoices

Example: How Much Could You Save? 

Let’s break it down.

Business A: £1,000/month energy bill

• At 20% VAT = £200/month
• At 5% VAT = £50/month
• Annual savings = £1,800

Multiply that by several years, and it’s easy to see why many SMEs chase VAT refunds.

Quick Checklist: Am I Overpaying VAT? 

• Do I know my current VAT rate?
• Have I reviewed my energy usage against de minimis limits?
• Am I operating from mixed-use premises?
• Have I submitted a VAT declaration form?
• Have I checked if past bills qualify for a refund?

Conclusion 

VAT on commercial energy can often feel like a maze of confusing rules and missed opportunities, but once you understand how it works, it becomes far easier to manage. Whether you're eligible for a reduced VAT rate, operating from mixed-use premises, or simply unaware of past overpayments, taking the time to explore your options could lead to substantial savings for your business.

With just a few proactive steps like checking your usage, submitting a relief form, or speaking to your supplier, you could reduce ongoing costs and even reclaim money you've unknowingly overpaid.

Don’t let hidden charges quietly drain your bottom line. Review your bills, question your VAT rate, and take action early to stay in control of your energy costs.

Summary Points

• Business energy VAT is typically 20% but 5% may apply
• The de minimis rule helps low-energy users save VAT
• Charities and mixed-use premises may qualify for lower rates
• You must apply for reduced rates; suppliers don’t do it automatically
• VAT reclaiming and backdated refunds can lead to major savings

Frequently Asked Questions 

Q1: What is the current VAT rate on business energy?

A1: The standard rate is 20%, but some businesses qualify for a reduced 5% rate under certain conditions.

Q2: Can I claim back VAT if my business is VAT registered?

A2: Yes, if you use energy for business purposes, you can reclaim VAT on your returns.

Q3: How do I know if I qualify for VAT relief?

A3: You may qualify if your business uses low energy, operates from mixed-use premises, or is a registered charity.

Q4: Can I get a refund for overpaid VAT?

A4: Yes. You can request a backdated refund of up to 4 years from your energy supplier.

Q5: Does VAT apply to green energy tariffs?

A5: Yes. VAT is charged regardless of the energy source unless you're eligible for specific exemptions.