A VAT-registered business can normally reclaim the VAT it pays on electricity as input tax, provided the electricity is used for taxable business purposes. That is a separate question from whether the reduced 5% VAT rate applies to the bill itself.
VAT on business energy trips a lot of people up because two separate questions hide inside one query: what rate of VAT should appear on the bill, and whether that VAT can be recovered afterwards.
Domestic customers only ever deal with the first question, since households cannot reclaim VAT at all. Business customers, especially VAT-registered ones, need to think about both.
If you run a limited company, sole trade or partnership and pay standard-rate VAT on electricity, there is a reasonable chance nobody has checked whether it is reclaimable. This guide is general information, not tax advice, and our guide to VAT on business energy bills covers the rates in more depth.
What VAT rate applies to business electricity by default?
Most businesses pay the standard 20% VAT rate on electricity. Unlike households, which are charged a reduced 5% rate as standard, there is no automatic reduced rate for commercial premises.
The clearest domestic-versus-business contrast
A household’s bill carries 5% VAT without any qualifying criteria, while a commercial premises defaults to the full standard rate unless a specific exemption applies. HMRC’s VAT on fuel and power guidance sets out exactly which supplies qualify.
This is one of the clearer contrasts between domestic and business energy, and it is where the reduced rate and the temporary zero rate both apply.
When does a business qualify for the reduced 5% VAT rate?
A business qualifies for the reduced 5% rate if it is a charity using electricity for non-business activities, if usage falls below HMRC’s low-use threshold, or if the premises has genuine mixed residential and business use.
Mixed residential and business premises
HMRC applies a de minimis usage threshold below which a business is automatically treated as domestic-equivalent for VAT. Mixed-use premises, such as a flat above a shop, a guesthouse or certain care homes, often see the residential portion charged at 5% and the business portion at 20% on the same meter.
From 1 October 2026 to 31 March 2027, a temporary zero rate applies to electricity supplies that already qualify for the 5% rate: charity, de minimis and mixed-use supplies drop to 0% instead of 5%. Standard 20% business electricity is unchanged, gas is not included, and the measure is due to revert to 5% on 1 April 2027 unless extended.
How is reclaiming VAT different from paying a reduced rate?
The VAT rate on the bill, 20% or 5%, is what the supplier charges upfront. Reclaiming VAT is a separate process where a VAT-registered business recovers the VAT already paid, as input tax, through its VAT return.
When you can only recover part
These two things get confused constantly. A business paying the reduced 5% rate has already had less VAT charged, while a business reclaiming VAT is recovering VAT it was charged at whatever rate applied.
Recovery only applies where the electricity supports taxable business supplies. A business making VAT-exempt supplies, such as certain financial or insurance services, often cannot recover the full amount, and HMRC’s guidance on reclaiming VAT covers partial recovery.
Can a VAT-registered business recover VAT on electricity bills?
Yes. If the business makes taxable supplies and the electricity is used wholly or partly for business purposes, it can reclaim the VAT through its normal VAT return submitted to HMRC.
A worked example of VAT recovery
| Scenario | VAT rate charged | Reclaimable through a VAT return? |
|---|---|---|
| Standard commercial premises, VAT registered | 20% | Yes, on the business-use proportion |
| Charity, non-business use | 5% (0% from Oct 2026) | No, there is no business VAT to recover |
| Mixed business and residential premises | Split 5% and 20% | Partially, on the business-use share only |
| VAT-exempt business (partial exemption) | 20% | Often restricted or partial recovery only |
As an illustration, a small business paying around £3,000 a year for electricity at the standard 20% rate has roughly £600 of VAT on that bill across the year. A fully taxable business can reclaim that whole amount, and our guide on how to read a business energy bill shows where to find the VAT line.
What happens with mixed business and domestic use?
Where one meter serves both business and residential use, the supplier apportions VAT between the two, charging 5% on the residential share and 20% on the business share, based on a reasonable estimate of the split.
Getting the apportionment right
This comes up most often for premises with living accommodation attached, such as a shop with a flat above it or certain care and hospitality sites. Getting the apportionment right on the bill also determines how much of the 20% element is reclaimable.
If your bill does not reflect the real split of usage, ask your supplier to review it. Comparing business electricity and business gas quotes at renewal is also a good moment to confirm the VAT treatment is correct.
