What VAT rate do businesses pay on gas and electricity?

Most businesses pay VAT at the standard rate of 20% on gas and electricity. However, some businesses qualify for a reduced VAT rate of 5% on their business energy.

The appropriate VAT rate depends on factors including:

• The level of your energy consumption.
• Whether your premises also qualify as a dwelling or residential accommodation.
• The nature of the business’s energy usage.

For VAT, residential accommodation is not limited to private households. Certain types of businesses that operate non-domestic premises are treated as residential accommodation where people live on a long-term basis. This can include:

• Care homes
• Nursing homes
• Student halls of residence
• Boarding schools
• Hospices

Where gas and electricity are supplied to these types of premises for qualifying residential use, the reduced VAT rate of 5% may apply to your business. However, areas that are not residential in nature, such as administrative offices, commercial outlets or conference facilities, may fall outside the reduced rate and be subject to the standard VAT rate.

This distinction is set out in HM Revenue & Customs guidance, specifically VAT Notice 701/19: Fuel and power, which explains how VAT applies to energy supplies, and when reduced rates can be charged.

Businesses supplied with energy to premises that fall within these definitions may need to provide evidence to their energy supplier to confirm the correct VAT treatment.

When can a business reclaim VAT on electricity and gas?

Your business can usually reclaim VAT on electricity and gas if it is VAT registered and the electricity is used for business purposes. In this case, the VAT paid on energy bills is treated as input tax and can be reclaimed through the VAT return, subject to the normal VAT deduction rules.

In practice, this means:

• Your business must be VAT registered with HM Revenue.
• The VAT must have been correctly charged by the energy supplier.
• The electricity must relate to taxable business activities.

Where these conditions are met, VAT-registered businesses are entitled to recover VAT paid on business electricity and other utility bills as part of their routine VAT accounting. The position may be more complex where supplies relate to mixed-use premises or activities that fall outside the scope of VAT, in which case only the recoverable proportion of VAT can be claimed.

When VAT on business energy cannot be reclaimed

There are situations where VAT paid on gas and electricity cannot be reclaimed in full, or at all. These include:

• If your business is not VAT registered.
• Your energy is used for domestic purposes rather than business purposes.
• Mixed-use premises where electricity supports both business and household energy usage.

In mixed-use cases, such as working from home, only the business-related proportion of VAT paid may be reclaimed, which can result in a partial refund rather than a full reclaim.

Which organisations can qualify for CCL exemptions or reductions?

Some organisations and activities are either fully exempt from CCL or eligible for reduced rates, including:

• Charities: energy used for non-commercial charitable activities may be exempt, although supplies used for business activities carried out by a charity are usually still liable.
• Educational establishments: schools, colleges, and universities may qualify for relief where energy is used for educational purposes rather than commercial activity.
• Public sector bodies: certain public services can qualify for relief depending on how energy is consumed.
• Energy-intensive businesses: organisations operating in specific industrial sectors may receive reduced CCL rates where they have entered into Climate Change Agreements (CCAs) with the government.
• Supplies used for domestic or residential accommodation: energy used in qualifying residential settings may fall outside the scope of CCL altogether.

The carbon price support rate applies to electricity generated from fossil fuels and is typically reflected upstream in electricity pricing rather than as a separate line item, but it still contributes to overall energy costs.

Eligibility is not automatic. In most cases, organisations must be correctly classified, and supporting declarations may be required to apply the correct treatment.

How BUH can advise on CCL exposure

Understanding whether CCL has been applied correctly often requires a closer look at how your site is classified, how your business uses energy and how the supply is structured. This is where reviewing energy arrangements alongside tax treatment becomes valuable.

Business Utility Hub can help by:

• Reviewing your current business energy bills to identify how CCL is being applied.
• Flagging where exemptions or reduced rates may be available based on your premises type or sector.
• Helping your businesses understand whether their current energy supplier has the correct information on file.
• Factoring your CCL exposure into wider business energy comparisons, to ensure the quoted rates reflect the full cost of supply.

For organisations with complex estates or mixed-use premises, a quick call with us on 0800 781 2700 can establish whether your current supply is offering you the best deal, and we can also consider ways your energy costs can be better managed to ensure you are paying the appropriate VAT rate and levy, rather than leaving you at risk of overpaying.

What paperwork is needed to reclaim VAT on business energy

To reclaim VAT on electricity, your business should keep clear records and documentation, including:

• A valid VAT registration certificate.
• A VAT number registered with HM Revenue.
• VAT invoices from your energy supplier showing VAT charged.
• A VAT declaration form or VAT adjustment form if corrections are needed.
• Evidence that the energy is used for business purposes.

Providing a valid VAT certificate to the energy provider can also help confirm that the correct VAT rate is applied to future bills.

How energy usage and efficiency can affect VAT and costs

While VAT rates themselves are set by legislation, energy usage directly affects the amount of VAT paid. Higher business energy usage leads to higher energy bills and more VAT charged overall.

Reviewing energy consumption patterns and comparing business gas and business electricity quotes, particularly as you approach the end of your current contract, will allow you to find the lowest cost deal for your operation.