What is VAT on business energy? Reduced rates explained

You have probably paid Value Added Tax (VAT) on something already today.

It is one of those costs that appears on almost all goods and services we all use daily.

However, many people don’t understand what it is, why they’re paying it or even whether they’re paying the correct amount. Do you know how much your business pays?

We are here to explain how VAT affects your business energy bills and whether your organisation could qualify for a reduced rate.

In this article:

• Learn what VAT is and how it is applied to business energy bills.
• Understand how much VAT businesses like yours pay.
• Discover how to check you’re paying the right amount of VAT.

What is VAT?

VAT is a government tax applied to most goods and services sold in the UK, including business energy.

All goods and services fall into one of three VAT categories:

• Standard - 20%
• Reduced - 5%
• Zero - 0%

Most goods and services fall under the standard rate. In this scenario, 20% VAT is added to the net price of a product to equal a final gross price.

VAT is usually marked on a separate line on your energy bills to make it easier to see what you’re paying for.

It is the third largest source of tax revenue for the UK Government, after Income Tax and National Insurance, raising £171 billion in the 2024/25 financial year according to UK Government statistics.

How much VAT do businesses pay on energy?

The standard 20% rate is generally applied to business electricity and gas bills.

For example, if your energy charges amount to £1,000, 20% VAT would then be applied, taking the total bill to £1,200.

VAT is usually applied to both your unit charges and standing charges. The more energy you use, the more VAT you pay.

However, not every business must pay the standard rate. Exceptions do apply.

How do businesses pay a lower rate of VAT?

Most commercial businesses do not qualify for the reduced rate and will pay 20% VAT.

However, some businesses and organisations may be eligible for the reduced 5% VAT rate on their energy bills if they fall into one of the following categories:

• Your organisation is a low user of energy (electricity and gas supplies are assessed separately. The threshold is less than 1,000kWh of electricity per month and less than 4,397kWh of gas per month).
• Charities using energy for charitable activities.
• Village halls and community centres.
• Places of worship.
• Residential care homes.
• Hospices.
• Non-profit organisations.

In these instances, if energy charges amount to £1,000, the 5% VAT rate would take the total bill to £1,050.

Businesses and organisations that qualify usually need to complete a VAT declaration form and provide it to their energy supplier. The supplier will then assess eligibility and apply the correct VAT rate.

How to check you’re paying the right VAT rate

Your VAT rate should be clearly marked on your business energy bill.

If you believe your organisation qualifies for a reduced rate, check your latest invoices and speak to your supplier. They may ask you to complete a declaration form before any changes can be applied.

It's also worth reviewing bills regularly to ensure VAT is being charged correctly, particularly if your business activities, premises or energy usage have changed.

How we can help

Business energy is confusing. You know you need to stay on top of such a major cost, but that can be difficult while focusing on running your business and serving your customers.

We get it. We can support you.

Troo exists to help businesses like yours make sense of their energy needs, simplify complex information and make smart decisions that lead to real change and reduced costs.

We are not here to sell you a quick fix. We're here to understand what matters to you, offer clear advice, and take ownership of the hard parts, so energy becomes one less thing to worry about.

Book a free energy health check today for practical guidance on your business electricity, gas or water bills.