Electricity VAT Drops To 0% In October. Most Small Businesses Will Not Get It

From 1 October 2026 until 31 March 2027, VAT on qualifying electricity supplies falls from 5% to 0%. Qualifying means domestic use, charity non-business use, or a de minimis supply, which HMRC sets at no more than 1,000 kWh a month. A business on a standard commercial tariff paying 20% VAT is not affected at all.

The announcement came from the Prime Minister's Office and is funded by cancelling the planned £1.8 billion Digital ID programme, at an estimated cost of £850 million in 2026-27. Coverage has been widely reported as a cut to business energy bills. For most limited companies, it is not.

Which businesses actually qualify for 0% VAT on electricity?

Four routes in, and only two of them are realistic for a typical SME:

1. Domestic use. Homes, residential accommodation, care homes and hospices. This is the route that matters if you run the business from home or let residential property.
2. Charity non-business use. Relevant if you are a charity or a community interest company with genuine non-business activity.
3. De minimis supplies. Electricity supplied at no more than 1,000 kWh a month, or 33 kWh a day. This is the route most micro businesses take, and it applies automatically at the meter level rather than by application.
4. Mixed use. Where at least 60% of consumption at a supply relates to qualifying use, the whole supply is treated as qualifying.

To put 1,000 kWh a month in context: a small office with a handful of desks, a kettle and a router will often sit under it. A salon with heat, a workshop with machinery, or a shop with refrigeration almost certainly will not.

What is not included?

Gas is not included. Domestic and qualifying gas supplies stay at the 5% reduced rate, and standard-rated business gas stays at 20%. Heating, steam and hot water keep their existing VAT liability too. Northern Ireland is excluded from the measure, with comparable funding provided instead.

The zero rate is also temporary. It runs to 31 March 2027, the end of the financial year, and its future will be considered at the Budget on 28 October 2026. Treat it as a six month change, not a permanent one.

What should a small business do before 1 October?

The single most important point is that the responsibility for the declaration sits with you, not your supplier. As Kreston Reeves notes, HMRC will tend to look to the customer of the supply rather than the supplier to recover any VAT that was undercharged. Getting a declaration wrong in your favour is your liability.

A sensible sequence:

• Pull your last twelve months of electricity bills and find the monthly kWh figure. If every month is under 1,000 kWh, you are de minimis.
• Check whether you have an existing certificate on file for domestic or charitable use, and whether it still reflects how the premises are used.
• If usage has changed since you last certified, correct it now rather than after the rate changes.
• From your October bill onward, check the VAT line actually shows 0%. Suppliers apply the rate they hold on file, and errors will not correct themselves.
• Diary a review for March 2027, when the rate is due to end.

The enabling legislation had not been published at the time of writing, so some practical detail is still to be confirmed. The qualifying categories are long-standing rules rather than new ones, so the checks above hold regardless.

Where automation helps and where it does not

This is a small, annual-scale saving for the businesses that qualify, and it is not worth building a system around. What is worth automating is the thing that caused the problem in the first place: nobody in the business is watching supplier bills line by line.

If your bookkeeping already captures utility invoices, a simple check that flags any month where the VAT rate on a recurring supplier changes takes an hour to set up and catches this and the next dozen changes like it. The saving is not the VAT. It is not having to read every announcement to find out whether it applies to you.