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Most businesses pay 20 percent VAT on their gas and electricity and assume that is simply the rate. But a reduced 5 percent rate exists, and more businesses qualify for it than realise. This guide explains when the 5 percent rate applies, how the low usage rule works, and how to claim it if you are eligible.
In short. Business energy is usually charged 20 percent VAT, but a 5 percent rate applies in two situations: very low usage below a set daily threshold, which is applied automatically, and qualifying use such as charities or premises used mainly for a domestic purpose, which you claim with a VAT declaration. Checking whether you qualify can quietly lower a bill you assumed was fixed.
VAT on business gas and electricity is normally 20 percent, the standard rate. The reduced 5 percent rate, the same one that applies to household energy, is the exception, and it applies in specific circumstances rather than on request. There are two main routes to it, low usage and qualifying use.
The first route is the de minimis rule, for very low consumption. If your site uses no more than 33 kWh of electricity per day, roughly 1,000 kWh a month, or no more than 145 kWh of gas per day, roughly 4,397 kWh a month, the whole supply for that fuel is charged at 5 percent automatically. No certificate is needed, because your usage itself qualifies it.
This suits small premises such as a modest office, a small salon or a lock up unit. The catch is that suppliers do not always apply it correctly, so if your usage is genuinely low it is worth checking your bill to confirm you are on 5 percent and not 20.
The second route is about how the energy is used rather than how much. Energy used for a domestic or charitable non business purpose qualifies for 5 percent.
Charities. Energy used for a charity non business activity qualifies for the reduced rate.
Domestic style premises. Care homes, residential accommodation, self catering holiday lets and similar uses count as qualifying.
Mixed use. Where at least 60 percent of the energy at a site is used for a qualifying purpose, the whole supply gets 5 percent. Below that, only the qualifying share does.
Unlike the low usage rule, qualifying use is not automatic. You claim it by giving your supplier a VAT declaration, a short form stating what proportion of the energy is used for a qualifying purpose. The supplier then applies 5 percent to the qualifying share, or to the whole supply if you are over the 60 percent threshold.
✓ Very low usage below the daily threshold gets 5 percent automatically.
✓ Charity non business use qualifies, claimed with a declaration.
✓ Domestic style premises such as care homes qualify.
✗ Assuming the reduced rate applies without checking. Suppliers often default everyone to 20 percent.
✗ Forgetting that qualifying use needs a declaration, without which you keep paying the standard rate.
If you have been charged 20 percent when you qualified for 5, you can usually reclaim the overpaid VAT for a backdated period, subject to the normal time limits. So it is worth checking not just your current rate but whether you have been on the wrong one for a while, because a correction can recover what you should never have paid.
Two businesses next door to each other can pay different VAT rates on the same energy, purely because one checked and one did not. If your usage is low, or your premises are used for a domestic or charitable purpose, confirm your rate and submit a declaration if you qualify. It is a five minute job on a cost you pay every month.
Check your current rate. Look at your bill and see whether VAT is charged at 20 or 5 percent.
Assess your usage. If it is very low, you may qualify automatically under the de minimis rule, so query it with your supplier.
Consider your use. If you are a charity or your premises are used mainly for a domestic purpose, request a VAT declaration form.
Reclaim if needed. If you have been overcharged, ask your supplier about recovering the overpaid VAT within the time limits.
The reduced rate is missed so often because the system defaults against it. Suppliers apply 20 percent as standard and rely on you to tell them if a lower rate is due, so a qualifying business that never queries its bill simply keeps paying the higher rate indefinitely. Nobody flags it for you.
It is worth a quick annual check, because circumstances change. A business that grows past the low usage threshold loses the automatic 5 percent, while one that changes how its premises are used, or gains charitable status, may newly qualify. Treating your VAT rate as something to confirm rather than assume is what keeps you on the right one.
Usually 20 percent, but a reduced 5 percent rate applies for very low usage or qualifying use such as charities and domestic style premises.
Either by using very little energy, below the daily de minimis threshold, which is automatic, or through qualifying use, which you claim with a VAT declaration form.
No more than 33 kWh of electricity per day, around 1,000 kWh a month, or 145 kWh of gas per day, around 4,397 kWh a month. Below that, the supply is charged at 5 percent.
Usually yes, for a backdated period within the normal time limits, if you were charged 20 percent when you qualified for 5. Ask your supplier.
For low usage, yes. For qualifying use such as a charity or domestic style premises, no, you must submit a VAT declaration to claim it.