When the Burnham government announced a cut in VAT on electricity from 5% to 0% for a six-month period from 1 October 2026, it was reported widely as relief for households struggling with high energy costs. What was less prominently reported is that the cut applies specifically to domestic electricity supplies. Business electricity remains subject to VAT at the standard rate of 20%.
For the majority of CoreAcc Accountants' clients — directors, sole traders, landlords, and small business owners — the announcement will not reduce their business energy bills. This article cuts through the confusion, explains what the cut does and does not cover, identifies the specific energy-related reliefs that do apply to businesses, and sets out practical steps to reduce your energy costs in the current environment.
What the October Cut Actually Covers
The October 2026 VAT reduction covers domestic electricity supplies — electricity provided to residential properties under a domestic tariff. It runs from 1 October 2026 for six months, meaning it is currently scheduled to expire on 31 March 2027, though the government has not ruled out extension.
The domestic rate includes electricity supplied to private homes, and also extends to certain residential properties that are supplied on a collective basis — blocks of flats using a landlord-managed supply, for example. It also covers electricity supplied to some specific categories of protected residential accommodation.
What it does not cover is any supply classified as a business supply under HMRC's rules. This includes all commercial premises — offices, retail units, restaurants, warehouses, workshops, and factories — regardless of the size of the business occupying them. A sole trader working from a dedicated commercial unit, a limited company in a serviced office, and a large employer in a business park all pay VAT on electricity at 20%.
Where the Line Falls: Mixed-Use Properties
The classification of a supply as domestic or business is not always straightforward when a property has a mixed use — part residential and part commercial.
A doctor who runs a consulting room from their home, a sole trader who has converted a garage into a dedicated workshop, or a landlord who lives in one flat of a property and rents out another all face a mixed-use situation. The VAT treatment of the electricity supply depends on how the supply is structured.
Where a single electricity supply covers both the domestic living areas and the business area, and the supply is on a domestic tariff, HMRC accepts that the reduced VAT rate applies to the whole supply in many circumstances. However, where the property has a separate business meter — as some larger home offices and workshops do — the supply on that meter is likely to be a business supply at 20%.
If you work from home and claim a proportion of your electricity bill as a business expense, the portion you claim is already generating a tax deduction — but the VAT on that portion remains at the full rate unless the supply itself qualifies as domestic.
If you are a landlord who provides electricity to tenants through a sub-metered arrangement or a communal supply, the VAT position depends on the nature of your supply and whether it meets the criteria for the domestic reduced rate. This is genuinely complex territory and worth discussing with your accountant if your property portfolio involves shared or managed energy supplies.
The VAT Reliefs That Do Apply to Businesses
While the October domestic rate cut does not help most businesses, several genuine VAT mechanisms do apply to business energy supplies and are worth being aware of.
The Climate Change Levy reduced rate applies to businesses that have entered into Climate Change Agreements with the Environment Agency. These are sectoral agreements requiring the business to meet energy efficiency and carbon reduction targets in exchange for a significant reduction in the Climate Change Levy — the additional charge on energy supplies to businesses that is separate from VAT. Not all businesses are eligible, and the process of entering an agreement involves committing to targets, but for energy-intensive businesses in qualifying sectors the savings are material.
The de minimis threshold for the reduced rate of VAT on energy applies to very small energy supplies. Where a business's average daily consumption of electricity is below 33 kilowatt-hours (roughly equivalent to a very small office or micro-business), the supply may qualify for VAT at the reduced rate of 5% rather than the standard 20%. This is automatic — it depends on actual consumption levels — but many small businesses do not know it applies to them. If your business uses very little electricity, check with your energy supplier whether you qualify.
The input VAT reclaim on business energy is fully available to VAT-registered businesses. If your business is VAT registered and you pay 20% VAT on your electricity, you reclaim that VAT on your VAT return in the usual way. The net cost of business electricity to a VAT-registered business is therefore the ex-VAT price — the 20% VAT is simply a pass-through. Non-VAT-registered businesses — those with turnover below £90,000 — cannot reclaim the VAT and face the full VAT-inclusive cost.
Capital Allowances on Energy-Efficient Equipment
For businesses looking to permanently reduce energy costs rather than simply manage the VAT treatment, the most powerful tool available is capital investment in energy-efficient equipment combined with the capital allowances available on qualifying expenditure.
The Annual Investment Allowance provides 100% first-year relief on qualifying plant and machinery expenditure up to £1 million per year. Equipment that qualifies includes energy-efficient heating systems, LED lighting upgrades, solar panels, heat pumps, battery storage systems, and energy management technology. A business that invests £20,000 in a qualifying solar installation can deduct the full £20,000 from taxable profit in the year of purchase — reducing Corporation Tax or Income Tax immediately while also cutting ongoing electricity costs.
Enhanced Capital Allowances at 100% in the first year are available for specific energy-saving technologies on HMRC's Energy Technology List. This list includes highly efficient products across a range of categories — boilers, combined heat and power systems, refrigeration equipment, variable speed drives, and others. Investment in listed products qualifies for the enhanced rate regardless of whether the business has used its full Annual Investment Allowance elsewhere.
For businesses that have invested in electric vehicle charging infrastructure — on-site charge points for staff or company vehicles — a 100% first-year allowance is available on qualifying expenditure. The combination of EV charging investment and the low benefit-in-kind rate of 3% on electric company cars makes this one of the most tax-efficient areas of business energy investment currently available.
Managing Energy Cost Risk in a Volatile Market
Beyond the tax and VAT dimension, the current energy price environment — shaped by Middle East geopolitical developments and the Bank of England's concerns about persistent inflationary pressure — makes active energy cost management a financial priority for most SMEs.
Fixed-price energy contracts, where available, provide certainty over forward costs and allow accurate cash flow forecasting. The trade-off is inflexibility — if energy prices fall significantly, a fixed contract locks you into a higher rate. In the current environment, where the Bank of England has described energy price risks as "tilted to the upside," the case for fixing is relatively strong for businesses that can tolerate the inflexibility.
Energy audits — systematic reviews of where and how your business uses energy — frequently identify quick-win reductions that require minimal capital investment. Behavioural changes in how equipment is used, improved insulation, smarter heating controls, and LED lighting are common starting points. Many energy suppliers and local enterprise partnerships offer subsidised or free energy audit services for small businesses.
The government's business energy efficiency schemes — including the Energy Efficiency Infrastructure Grant and various devolved equivalents — provide capital grants for qualifying energy improvement projects. Eligibility and availability vary by region, sector, and project type. CoreAcc Accountants can help you identify which schemes your business might qualify for and structure the investment to maximise the available capital allowance relief alongside any grant funding.
What to Expect From the Autumn Budget
Energy taxation — both the direct tax on business energy and the VAT framework — is an area where the 28 October Budget could bring changes. A permanent domestic rate reduction, rather than a six-month temporary cut, would require a fiscal decision the government has not yet made. Any extension or expansion of the domestic relief to cover some categories of business use is theoretically possible but has not been signalled.
The Climate Change Levy rates, energy efficiency grant programmes, and capital allowance rates for energy equipment are all within scope for Budget announcements. CoreAcc Accountants will publish a full Budget analysis on 28 October 2026 covering any energy-related tax changes.
Want to understand the energy reliefs available to your business or review your energy cost position? Contact CoreAcc Accountants today.
CoreAcc Accountants is an ACCA-accredited firm of Chartered Certified Accountants. This article was published on 28 August 2026 and reflects legislation and HMRC guidance in force at that date. It does not constitute professional advice. Always seek specific advice for your individual circumstances.
