How much is VAT on business energy?

Businesses have to pay VAT on their energy costs. But can you claim it back as part of your business expenses? And is your business eligible for a discount? Read on to find out the answers to these questions and more.

What is VAT?

VAT, or value-added tax, is a government charge on goods or services. This includes the sale and purchase of consumer items, as well as assets, financial advice, commission, rentals and utilities. 

VAT is added to the price of nearly everything you can buy. There are some exemptions, including financial services, investments and insurance, education and training (excluding private schools), healthcare and medical treatment, funeral plans, burial or cremation services, charity events, and more. For a full list, visit the government website.

Does my business have to pay VAT?

If your business’s taxable annual income is above £90,000 then you need to register to charge VAT on the goods or services you sell, though you can volunteer to pay VAT if your turnover is less.

Should your business be VAT-registered?

If your business has an annual turnover of more than £90,000, then you are legally obliged to be VAT registered. You can register your business at the government website, and this must be done within 30 days of going over the threshold.

When you register you will be sent a VAT certificate and details on when you need to submit a VAT return.

You can also register for VAT if you have a lower turnover than £90,000. Doing so means you can charge VAT on invoices and then claim it back on services, such as business energy.

Claiming back VAT isn’t always possible and if you use any of the goods or services for personal and business use, you can only claim back the bits used for business. For example, if half of your mobile phone calls are personal, you'll only be able to claim back 50% of the phone's purchase price and service plan.

If you do become VAT registered, you should include the 20% VAT in the price of your goods and services. You then need to pay this VAT to HM Revenue and Customs (HMRC) every three months.

If you're thinking of becoming VAT registered, you should consider the pros and cons if you have a small business and want to keep costs and admin down.

Does my business have to pay VAT on energy?

Gas and electricity tariffs for businesses automatically have VAT added to them. This will be at the 20% rate unless you're eligible for the reduced rate of 5%.

If you run your business from home, you'll need to pay 20% VAT on the gas and electricity used for business purposes. The rest will be paid at the 5% rate for domestic use. If you use less than 1,000kWh per month of electricity or 4,397kWh per month of gas, you can apply for the reduced rate of VAT on non-domestic energy (more on that below).

How much VAT do I pay on business energy?

Most businesses pay a 20% rate of VAT on business energy. Your supplier automatically adds this to your bill. You might be eligible for a 5% discounted rate depending on the type of business you own and the way you use energy.

How do I get a discounted rate for VAT on business energy?

Your business might qualify for a 5% discount on business energy VAT if:

• It is a charitable or non-profit organisation: You might even be able to claim back overpayment rebates for the previous four years if you didn’t know you were eligible for the discount and as a result, you were overpaying
• You use at least 60% of your energy for ‘domestic purposes’: For example, if your business is also used for residential purposes, such as a care home or self-catering holiday accommodation. The 5% discount applies to the whole bill if you use 60% or more for domestic reasons, but if it’s less than 60% then only the proportion of energy used for domestic reasons is eligible
• You have a ‘low’ usage of energy: Low energy usage is usually defined as using less than 1,000kWh of electricity every month (33kWh a day), or 4,397kWh of gas (145kWh a day)

If you believe your business may qualify for a reduced VAT rate on business energy you must submit a VAT declaration form, which you can get from your supplier. You’ll also be able to use the form to claim any overpayments from the last four years.

You’ll have to submit a separate declaration form for business gas and electricity.

How much VAT might I pay on my energy bills?

If you run a micro business or small business, here are some examples of how much VAT might add to your annual energy bills:

VAT on business electricity bills

Business size	Average business electricity bill (per year)	VAT at 5% rate	VAT at 20% rate
Microbusiness	£2,668 (based on annual usage of 10,000 kWh)	£133	£534
Small business	£5,232 (based on annual usage of 20,000 kWh)	£262	£1,046

VAT on business gas bills

Business size	Average business gas bill (per year)	VAT at 5% rate	VAT at 20% rate
Microbusiness	£871 (based on annual usage of 10,000 kWh)	£44	£174
Small business	£1,833 (based on annual usage of 22,500 kWh)	£92	£367

^{Note: Prices are correct as of March 2025. Rates and bill size may vary according to your meter type and business location. The prices you’re quoted may be different from the averages shown. The figures shown are the average unit rates and standing charges on contracts sold by Bionic from May 1 to May 6, 2025.}

Can I claim back VAT paid on energy bills?

If your business is VAT registered, you should be eligible to recover the VAT in full on your business expenses, subject to the normal rules on VAT deduction. This includes VAT on energy costs whether you're paying the normal 20% rate or reduced 5% rate.

You can apply for the reduced rate of 5% VAT if any of the following apply to your business:

• 60% of your office is used as a residential space. This is helpful if you work from home and have a small business
• You run a non-profit or charitable enterprise
• You operate self-catering housing for holidays
• Use less than 1,000kWh per month of electricity or 4,397kWh per month of gas

You may find you qualify partially for the discounted rate and need to pay the higher rate in some cases. It’s best to speak directly with suppliers to tailor a solution for your business.

To check how much tax your business can claim back, check the HMRC website.

If you qualify for the discount on business energy VAT rates you might also be exempt from paying some, or all, of the Climate Change Levy.

What is the Climate Change Levy?

The Climate Change Levy (CCL) is a tax designed to promote energy efficiency and lower gas emissions for businesses. It only applies to units of electricity and gas you use, not to any other parts of your bill – for example, you won’t have to pay a levy on late payment fees or the standing charge.

How does the climate change levy affect VAT on business energy?

If you qualify for a reduced VAT on business electricity or gas and you meet the ‘low’ usage requirements (less than 1,000kWh per month of electricity or 4,397kWh per month of gas) you won’t need to pay the climate change levy.

Take control of your business energy bills

If you pay the normal VAT rate on your business energy bills and can't claim it back as an expense, you're paying an extra 20% each quarter. If you're on your supplier's out-of-contract rates, you could be overpaying by 33% or more compared to a fixed-rate contract.

While we can't do anything about your VAT bill, we can help with those expensive out-of-contract rates. Call our energy experts now on 0800 140 4667 or give us your postcode to start a business energy price comparison.