When Can a Business Pay 5% VAT on Energy Bills?

Most Businesses Pay 20% VAT on Energy - But Not All Have To

In most cases, UK businesses pay the standard 20 percent VAT rate on their energy bills. However, certain businesses and organisations are eligible for a reduced rate of 5 percent. This can result in significant savings, especially for small enterprises or those with mixed-use premises.

Understanding when the reduced rate applies can help businesses ensure they are not overpaying for utilities. Below is a breakdown of when a business can legitimately benefit from the 5 percent VAT rate on energy.

1. Mixed-Use Premises

Some businesses operate from premises that are used both commercially and residentially. In these cases, part of the energy usage may qualify for the reduced VAT rate.

For example, a bed and breakfast where the owner resides on-site or provides domestic accommodation to guests can benefit. If at least 60 percent of the energy is used for qualifying domestic purposes, the entire energy bill may be charged at the 5 percent VAT rate.

2. Charities

Registered charities may also be eligible for the reduced rate, provided the energy is used solely for non-business activities. This means the energy must be used for charitable purposes rather than for commercial ventures such as charity shops or cafés.

Charities must usually submit a VAT declaration form to their energy supplier to claim the reduced rate.

3. Low Energy Usage

Businesses that use relatively small amounts of energy may qualify automatically under what is known as the de minimis rule.

The thresholds are:

• Less than 145 kilowatt-hours of gas per day (approximately 4,397 kWh per month)
• Less than 33 kilowatt-hours of electricity per day (approximately 1,000 kWh per month)

If consumption stays below these limits, the energy supplier should apply the 5 percent VAT rate without the need for further action.

4. Residential and Similar Use

Energy supplied for residential accommodation or similar purposes may also attract the reduced VAT rate. This includes:

• Care homes
• Student accommodation
• Self-catering holiday lets
• Hospices
• Children’s homes
• Religious community housing 

If the energy is used for qualifying purposes, the supplier may apply the reduced rate to the entire bill or a portion of it.

Are You Overpaying VAT on Your Energy?

Many businesses and organisations may be eligible for reduced VAT on energy bills but may not be aware of it. Where eligibility exists, a VAT declaration form will usually need to be submitted to the supplier. 

If your business operates from mixed-use premises, is a registered charity, or meets the usage thresholds, it is worth reviewing your current VAT treatment on energy. Our team can advise on eligibility and assist with submitting the correct declarations to energy providers.

Contact Energy Solicitors for VAT Support

Get in touch with our team today for further guidance.