Zero VAT on electricity: the small businesses that gain

Qualifying electricity in Great Britain carries no VAT from 1 October 2026 to 31 March 2027. Low-use small businesses can qualify. How to check your bill.

Since 1 October 2026, qualifying electricity in Great Britain has carried no VAT at all. The zero rate runs to 31 March 2027, and it reaches beyond home bills: a business premises using no more than an average of 1,000 kWh a month is treated as domestic for VAT.

So a one-chair barber, a small studio or a lock-up workshop may see the VAT disappear from its electricity bill this winter. Larger users stay on the standard rate, and for many VAT-registered firms the change makes no difference at all.

What changed on 1 October

The government announced the cut on 21 July 2026. Electricity that used to carry the reduced rate of 5 per cent is now zero-rated, and the rules on what qualifies have not changed. Qualifying gas and other fuels stay at 5 per cent. In Northern Ireland, qualifying electricity stays at 5 per cent.

The announcement named who benefits beyond households: "Small businesses who qualify for the domestic energy VAT relief and are not registered for VAT", plus charities and residential care homes eligible for the reduced rate.

The 1,000 kWh test

VAT law looks at how much electricity you use, not who you are. HMRC's fuel and power notice treats a supply averaging no more than 33 kWh a day, or 1,000 kWh a month, to one customer at one premises as domestic use, even when the customer is a business. No certificate is needed, and the standing charge goes on the same rate as the rest of the bill.

Above that level, a purely business supply is charged at the standard rate of 20 per cent, and the cut does not touch it.

Shared premises have a rule of their own. Where a shop and the flat above share a supply and 60 per cent or more of it is domestic, the whole supply is treated as domestic. Below 60 per cent, the domestic share is relieved and the rest is charged at 20 per cent. Your supplier will want a signed certificate giving the exact percentage.

Illustration, not a real client. A nail bar on a London parade uses 700 kWh a month and pays £200 a month for electricity before VAT. At 5 per cent, that was £10 of VAT a month. From 1 October it is nothing: about £60 over the six months. If the business is not VAT registered, that £60 stays in the till.

Why most VAT-registered firms gain nothing

If you are registered for VAT, you reclaim the VAT on business purchases through your VAT return. The VAT on a business electricity bill was never really your cost. Cut the rate and there is simply less to reclaim.

Two groups of small businesses do gain:

Businesses that are not VAT registered. A business with taxable turnover under the £90,000 threshold does not have to register. If it has not, VAT on a bill is a cost, so a lower rate is a real saving.
Businesses on the Flat Rate Scheme. They pay HMRC a fixed rate of VAT and cannot reclaim VAT on purchases, except certain capital assets over £2,000.

Our explainer on how the electricity VAT cut works for businesses goes through each case.

What to do before 31 March

Your October bill may show two rates. Where a billing period runs across 1 October, suppliers can split it by when the electricity was used, and HMRC recommends meter readings to do it.

Find your last 12 electricity bills and work out the average monthly use, in kWh, at each premises.
Check the VAT line on the first bill dated after 1 October. At or under 1,000 kWh a month, it should show 0 per cent from that date.
If it shows 20 per cent, ask your supplier why. A low-use premises on 20 per cent was probably overcharged before October as well, and our guide to the 5 and 20 per cent rates on energy bills explains how to put that right. If the premises is part home, part business, send a certificate with the exact domestic percentage.
If you took a meter reading on or near 1 October, send it to your supplier so the split is right.
Put 31 March 2027 in the diary. As things stand, the rate goes back to 5 per cent after that date.

The government has said any further action will come at the Budget on 28 October 2026. Read it with your kWh figure to hand.

About the author

Harvey Dhillon is the founder and CEO of Zmartly, a UK accountancy firm for small businesses. He grew up in West London and worked in finance roles in investment banking, wealth management and private equity, starting at Barclays, before leaving in 2020 to build the firm. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by Joakim Kingstrom on Unsplash.