Most business energy bills carry VAT at 20%. But a lot of small businesses and sole traders qualify for the reduced 5% rate and don't realise it, which means they're quietly overpaying every month.
This guide explains when 5% applies instead of 20%, how the de minimis rule works, what happens with mixed-use premises, and how to fix things if you've been charged the wrong rate. It's written for sole traders, contractors and small businesses, especially anyone working from home or from a low-usage commercial unit.
If you read one thing, read the de minimis section. That's where most of the savings hide.
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Why does the VAT rate on energy matter?
VAT applies to most goods and services in the UK, and energy is no exception. The standard rate is 20%. But qualifying electricity and gas can be charged at the reduced rate of just 5%.
For a business watching its costs, that gap is real money. The reduced rate is meant to treat energy as a necessity, so households and low-usage premises pay less.
In practice, the mistake we most often see is a sole trader on a domestic or low-usage supply being billed at 20% because nobody checked. The rate isn't always applied automatically when a business account is involved, so it pays to look.
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Who qualifies for 5% VAT on electricity and gas?
There are two common routes to the 5% rate for small businesses and the self-employed.
Domestic use. If your energy goes to a home, the supply is treated as domestic and charged at 5% by default. That covers you if you work from home, including a converted room or a garden office, because the supply to the property is domestic.
Low-usage commercial premises (de minimis). If your business premises use a small enough quantity of energy, the supply is automatically treated as for domestic use and charged at 5%, even though it's a business. This is the de minimis rule, and it's the bit most people miss.
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What is the de minimis rule for business energy?
The de minimis rule sets a usage level below which a supply is always treated as being for domestic use, so it gets the 5% rate regardless of the type of premises.
The thresholds, from HMRC's VAT Notice 701/19, are:
| Fuel | De minimis limit (per day) | Per month |
|---|---|---|
| Electricity | 33 kWh | 1,000 kWh |
| Gas | 145 kWh | 4,397 kWh |
If all the electricity supplied to you at the premises averages no more than 1,000 kWh a month, the whole supply qualifies for the reduced rate. The same logic applies to gas at 4,397 kWh a month.
This suits a lot of small operations: home offices, small studios and workshops, co-working desks, and low-footfall retail units.
If your usage sits below these levels but your bill still shows 20%, you're probably being overcharged, and you may be able to claim it back. HMRC's standard four-year window applies to VAT, so a correction can cover past bills as well as future ones.
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When does the 20% rate apply?
You'll pay the standard 20% rate where:
- your supply is non-domestic and your usage is above the de minimis limits, or
- you run a larger operation such as a busy shop, cafe or production unit, or
- the supply is wholly business and you haven't told your supplier about any qualifying use.
This is the default for most commercial supplies. The catch is that some small businesses end up here unnecessarily, either because they never declared their qualifying use or because the supplier never assessed it.
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How much could you save?
The numbers below are illustrative examples using round figures. Your own bills will differ, but they show the size of the gap.
Illustrative example: a home-based microbusiness. Annual electricity of £2,800 before VAT.
- At 20%: £560 of VAT a year.
- At 5%: £140 of VAT a year.
- Annual difference: £420.
- Over four years: £1,680.
Illustrative example: a low-usage workshop. Annual electricity of £4,500 before VAT, with usage under the de minimis limit.
- At 20%: £900 of VAT a year.
- At 5%: £225 of VAT a year.
- Annual difference: £675.
- Over four years: £2,700.
A point worth stressing: if you're VAT registered and operating from commercial premises, you'd normally reclaim the VAT on your return anyway, so the rate matters less. The de minimis savings bite hardest for businesses that can't reclaim, which we cover below.
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How does working from home affect your VAT?
If you're self-employed and work from home, your energy supply is usually domestic, so it's charged at 5% automatically. You don't need to do anything to get that rate.
Here's the part that trips people up. You generally can't reclaim the VAT on a domestic energy supply, even if you're VAT registered, because the supply is mixed (part business, part personal) and HMRC doesn't allow VAT recovery on personal use.
You can still claim a proportion of your energy costs as a business expense for income tax, based on how much of your home you use for work and for how long. If you want a hand getting that split right, our self-assessment services cover exactly this, and our sole trader page sets out what we do for people working for themselves.
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What about mixed-use properties?
Some people run a business from premises that are part domestic and part commercial, such as a shop with a flat above, or a studio attached to the home.
HMRC uses a 60% test for these mixed supplies:
- If 60% or more of the energy is for qualifying use (domestic or low-usage), the whole supply is charged at 5%.
- If less than 60% qualifies, the supplier apportions the bill: 5% on the qualifying part and 20% on the rest.
Illustrative example: apportioned mixed use. Total electricity of £3,000 before VAT, split 60% domestic and 40% commercial, where the commercial part is above the de minimis limit.
- Domestic 60% (£1,800) at 5% VAT: £90.
- Commercial 40% (£1,200) at 20% VAT: £240.
- Total VAT: £330, instead of £600 at a flat 20%.
To get an apportionment or the full 5% rate, you'll usually complete your supplier's VAT declaration (sometimes called a certificate) and give a reasonable estimate of the split. It's worth the admin, because the saving repeats every month.
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What is the Climate Change Levy?
Beyond VAT, many business energy bills carry the Climate Change Levy (CCL), an environmental tax charged per unit of energy used. It shows as a separate line on your bill and VAT is then applied on top.
For 2025/26 (from 1 April 2025), the main CCL rates are £0.00775 per kWh for both electricity and gas. These rise to £0.00801 per kWh from 1 April 2026. Always check the current figure on the gov.uk CCL rates page before relying on it.
CCL does not apply to energy supplied for domestic use or to charities for non-business use. In practice, if your supply qualifies for the 5% reduced VAT rate (including de minimis low-usage commercial supplies treated as domestic), it's generally outside the main CCL charge too. So qualifying can help you twice: lower VAT and no CCL.
Illustrative example: CCL on a larger supply. A business uses 15,000 kWh of electricity in 2025/26 and is above the de minimis limit, so it pays 20% VAT and CCL.
- CCL: 15,000 x £0.00775 = £116.25.
If the same business were instead below the de minimis limit, it would pay 5% VAT and no CCL on that supply.
If you see CCL on your bill but think you qualify for the reduced VAT rate, raise it with your supplier with evidence of your usage.
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How do you check what rate you're on?
It's quicker than you'd think.
- Read the bill. VAT is shown as a separate line, usually near the total, at either 5% or 20%.
- Check your usage. Add up your monthly kWh and compare to the de minimis limits (1,000 kWh a month for electricity, 4,397 kWh for gas). Consistently below means you should be on 5%.
- Review your setup. Home, small office, domestic tariff or business tariff? That points to which route applies.
- Look for CCL. If you see CCL but qualify for 5% VAT, you may be charged both in error.
- Ask your supplier. They can confirm your status and start a reduced-rate application if you qualify.
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What should you do if you've been overcharged VAT?
If you've been on 20% when 5% should apply, you can usually fix it and reclaim. Here's the order we'd suggest.
- Gather records. Pull together at least 12 months of bills. Work out your average daily usage: total your monthly kWh for the year, divide by 365, and compare to 33 kWh/day for electricity or 145 kWh/day for gas.
- Request a VAT declaration form from your supplier and explain that your usage is below the de minimis threshold or that the supply is domestic.
- Provide evidence. Recent bills showing usage, proof of your business type, and for home workers, something showing the property is residential.
- Ask for a refund of the overpaid VAT. Suppliers can normally go back up to four years, in line with HMRC's standard four-year cap.
- Confirm the going-forward rate in writing so future bills are correct.
- Keep everything. Save the declaration and all correspondence for your records.
If the supplier won't act despite clear evidence, use their formal complaints process and, if it's still unresolved, the Energy Ombudsman. An accountant can back your claim with the calculations.
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Can you reclaim VAT on energy bills?
If you're VAT registered, whether you can reclaim depends on how and where you work.
- Commercial premises at 20%: you can normally reclaim the full VAT as a business expense, provided the energy is for business use.
- Home, domestic supply at 5%: you generally can't reclaim, because the supply is mixed use. You claim a proportion as an income tax expense instead.
- Low-usage commercial at 5%: you can reclaim, but only the 5% you were charged, so the figure is smaller than at 20%.
For a mixed-use property, you can only reclaim the VAT on the genuinely commercial portion, which your supplier should show separately once you've submitted the declaration. Keep proper invoices showing the VAT rate and amount, and only claim genuine business use, as HMRC can ask you to justify a claim that looks high for your size. If VAT returns are a regular headache, our tax advisory services and small business support can take it off your plate.
Want this checked properly?
Not sure whether your energy supply should be on 5% or 20%? Book a free 20-minute call with a Zmartly accountant. We'll review your bills, work out whether you qualify, and help you reclaim any overpaid VAT going back up to four years. Talk to a Zmartly accountant.
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FAQs
What is the VAT rate on domestic gas and electricity in the UK?
It's 5%. The reduced rate applies to household energy automatically, so you don't need to apply for it on a residential supply.
How much VAT do businesses pay on electricity?
Usually 20%, unless you qualify for the reduced 5% rate. You qualify if your supply is domestic, or if your usage is at or below the de minimis limit of 1,000 kWh a month (33 kWh a day) for electricity.
What is the de minimis rule for business energy?
It's a usage level below which a supply is always treated as domestic and charged at 5%. The limits are 33 kWh a day (1,000 kWh a month) for electricity and 145 kWh a day (4,397 kWh a month) for gas, per HMRC's VAT Notice 701/19.
Can I reclaim VAT on energy bills if I work from home?
Generally no. A domestic supply at 5% is treated as mixed use, so VAT isn't recoverable. You can claim a proportion of the cost as a business expense for income tax through self-assessment.
What should I do if I've been overcharged VAT on energy?
Contact your supplier, ask for a VAT declaration form, and provide evidence of your usage and business type. Suppliers can usually refund overpaid VAT going back up to four years, in line with HMRC's standard cap.
Do mixed-use properties qualify for reduced VAT?
Yes. If 60% or more of the energy is for qualifying use, the whole supply is charged at 5%. If less than 60% qualifies, the supplier apportions it, charging 5% on the qualifying part and 20% on the rest.
What is the Climate Change Levy and do I have to pay it?
CCL is an environmental tax on business energy. For 2025/26 the main rate is £0.00775 per kWh for electricity and gas, rising to £0.00801 from 1 April 2026. Domestic use and charity non-business use are outside it, and supplies that qualify for 5% VAT are generally outside the main CCL charge too.
