Businesses paying 20 per cent VAT on energy may qualify for the 5 per cent reduced rate if monthly consumption is below 1,000 kWh for electricity or 4,397 kWh for gas, or if the supply is used for qualifying domestic or charitable purposes. The declaration is made to the supplier using a VAT certificate. Historical overcharges can be reclaimed.
Last reviewed: 12 May 2026
The Default Rate and Why It Is Often Wrong
VAT on business energy is charged at the standard rate of 20 per cent by default. Suppliers apply this rate unless the customer provides a declaration that a qualifying condition for the 5 per cent reduced rate is met. Because the declaration must come from the customer, businesses that qualify but do not know to make the declaration continue paying the higher rate indefinitely.
HMRC VAT Notice 701/19 (Fuel and Power) is the authoritative source governing VAT liability on energy supplied in the UK. It sets out the conditions under which the reduced 5 per cent rate applies to supplies of gas and electricity to non-domestic customers.
Incorrectly charged VAT at 20 per cent where 5 per cent is due is not merely an accounting inconvenience. For a small business spending £2,000 per quarter on energy, the VAT difference is £300 per quarter, or £1,200 per year. Over several years on an incorrect rate, the cumulative overcharge is significant and recoverable.
The Qualifying Conditions for 5% VAT
Five distinct conditions can qualify a supply of business energy for the 5 per cent reduced rate. Each applies independently: a supply that meets any one of the conditions qualifies, not only those that meet all of them.
Condition 1: Low consumption - electricity If electricity consumption at a supply point does not exceed 1,000 kWh in a calendar month, the entire supply for that month qualifies for the 5 per cent rate. This threshold is assessed per meter point, not per business. A business with multiple meters is assessed separately at each one.
If consumption in a given month exceeds 1,000 kWh, the entire supply for that month reverts to the 20 per cent standard rate. There is no partial application of the two rates within a single month under the low-consumption condition.
Condition 2: Low consumption - gas The equivalent threshold for gas is 4,397 kWh per month (which corresponds to 150 therms, the historical unit in which the threshold was originally set). The same month-by-month assessment applies: if consumption exceeds 4,397 kWh in a month, the standard 20 per cent rate applies for that month.
Condition 3: Qualifying use - domestic Where energy is supplied to premises that are used for residential purposes, the 5 per cent rate applies to the proportion of supply attributable to the domestic use. This condition is most commonly relevant to businesses that incorporate a residential element, such as a pub with a landlord's accommodation or a care home where some supply is attributable to residents' private use.
Condition 4: Qualifying use - charitable non-business activity Charities using energy for their non-business activities qualify for the 5 per cent rate on that portion of supply. A charity running a commercial trading subsidiary alongside its charitable activities must apportion the supply between the two uses. The non-business charitable portion qualifies; the trading portion does not.
Condition 5: De minimis supplies Where the total supply is de minimis in value, HMRC allows the 5 per cent rate to apply to the whole supply rather than requiring a complex apportionment. The de minimis threshold is defined in VAT Notice 701/19.
How to Declare Eligibility to Your Supplier
The mechanism for accessing the reduced rate is a VAT declaration, sometimes called a VAT certificate or VAT 1 certificate, provided by the customer to the supplier. There is no standard HMRC form for this in most business cases. The declaration is a written statement from the customer confirming which qualifying condition applies and the proportion of supply to which it relates.
The declaration should include:
- The name and address of the business
- The supply address and meter point reference (MPAN or MPRN)
- The qualifying condition being claimed (low consumption, qualifying domestic use, or charitable use)
- The proportion of supply qualifying for the reduced rate where a mixed-use apportionment applies
- A statement that the customer will notify the supplier if circumstances change
Once the declaration is provided, the supplier is obliged to apply the reduced rate to qualifying supplies from the date the declaration is received. Suppliers are not required to apply the reduced rate retrospectively to periods before the declaration was made, but they may do so where the customer can demonstrate the qualifying conditions were met in prior periods.
For businesses qualifying under the low-consumption thresholds, the practical approach is to submit the declaration and monitor monthly consumption to ensure it remains below the qualifying threshold. Some suppliers apply the reduced rate automatically where their billing system shows consumption consistently below the threshold, but this is not guaranteed.
The De Minimis Thresholds in Practice
The monthly thresholds of 1,000 kWh for electricity and 4,397 kWh for gas are more generous than most small businesses assume. To contextualise:
- A small office of 10 to 15 people in a reasonably efficient building typically consumes 600 to 900 kWh of electricity per month, placing it below the threshold
- A small retail unit with limited HVAC and LED lighting may consume 400 to 700 kWh per month
- A small gas-heated office typically uses 1,500 to 3,500 kWh of gas per month in winter, which exceeds the threshold, but may fall below it in summer months
The month-by-month application of the threshold means a business that exceeds it in winter but falls below it in summer should technically be on 20 per cent VAT in winter months and 5 per cent in summer. In practice, many suppliers apply a single rate year-round based on an annualised consumption assessment. Whether this benefits or disadvantages the business depends on the consumption pattern.
Businesses with seasonal consumption patterns should review whether the VAT rate applied to each monthly invoice reflects the actual consumption in that billing period.
Reclaiming Historical VAT Overcharges
Where a business has been charged VAT at 20 per cent and was eligible for the 5 per cent rate during that period, there are two routes to recovery:
Route 1: Supplier credit note Raise a formal billing dispute with the supplier, providing the qualifying condition and evidence of consumption for the relevant periods. The supplier should issue a credit note for the VAT difference. The credit reduces the amount of VAT the supplier has previously accounted for to HMRC, and the supplier adjusts their VAT return accordingly.
Route 2: HMRC direct claim In some circumstances, the business may be entitled to claim the overpaid VAT directly from HMRC. This is more complex and requires evidence that the supplier is unable or unwilling to process the correction. HMRC's guidance on recovering incorrectly charged VAT is set out in their published VAT manuals.
The time limit for recovering overpaid VAT is generally four years from the date of the relevant VAT return, under the VAT Act 1994. However, the practical window for supplier credit notes may be shorter depending on the supplier's billing dispute policy and the Ofgem back-billing rules that limit recovery of charges beyond 12 months.
Common Scenarios Where 5% Is Missed
Scenario 1: The home-based business A sole trader or small business operating from a residential address is often charged 20 per cent VAT on a commercial energy contract taken out in the business name. If the premises are primarily residential and business use is incidental, the supply may qualify as predominantly domestic and the reduced rate may apply to some or all of the consumption.
Scenario 2: The small retail unit with summer-only low consumption A seasonal retailer or tourism business may have monthly electricity consumption below 1,000 kWh from May to September but above it from October to April. A supplier applying an annual average rate may charge 20 per cent throughout the year, resulting in overpayment in the low-consumption months.
Scenario 3: The charity with mixed activities A charity running community events (non-business) and a commercial cafe (trading) in the same premises is entitled to the 5 per cent rate on the proportion attributable to the non-business activities. Without a formal apportionment declaration, the supplier will charge 20 per cent on the entire supply.
Frequently asked questions
Editorial disclaimer: This information is provided for general guidance only. VAT liability depends on individual circumstances. For complex mixed-use situations or significant historical claims, consult a VAT specialist or accountant.
Does the 5% reduced rate apply to both electricity and gas?
Yes. The qualifying conditions in HMRC VAT Notice 701/19 apply to both electricity and gas. The consumption thresholds differ: 1,000 kWh per month for electricity and 4,397 kWh per month for gas.
What happens if my consumption varies month to month around the threshold?
The VAT rate should technically vary month by month based on actual consumption. If your consumption is below the threshold in some months and above it in others, you should be on 5 per cent in the qualifying months and 20 per cent in others. Review each invoice to confirm the rate applied matches the consumption for that period.
Do I need to complete an HMRC form to claim the reduced rate?
There is no specific HMRC form for most business reduced-rate claims. A written declaration to the supplier is sufficient. Some suppliers have their own declaration forms; others accept a letter.
Can a limited company qualify for the domestic use reduced rate?
A limited company can qualify where the supply is to premises that include a domestic element, for example a mixed-use property where part of the building is used as residential accommodation. The 5 per cent rate applies only to the proportion attributable to the domestic use.
How far back can I reclaim overpaid VAT on energy?
The general VAT time limit is four years. In practice, the ability to recover historical overcharges depends on whether the supplier will issue credit notes and whether HMRC accepts a direct claim. Start with a formal supplier dispute before pursuing HMRC directly.
How we verified this
This article draws on published guidance from Ofgem, the Department for Energy Security and Net Zero, and the primary legislation and regulatory sources listed in the Sources section. No aggregator or supplier-produced content was used as a primary source.
