Government cut VAT on electricity for households. Read note 5 and it covers small shops too

Short answer: most business electricity carries 20% VAT, but if your premises uses no more than 33 kilowatt hours a day HMRC treats the supply as domestic, which means 5% today and 0% from 1 October 2026 to 31 March 2027 in England, Wales and Scotland. Nobody sends you a letter about this. It is a number on your own bill, and plenty of small shops are on the wrong side of it.

Start with the bill, not the rule

Find your latest electricity invoice and look for two things. One is the VAT percentage. The other is your consumption in kilowatt hours for the billing period.

If the VAT says 20%, and your usage works out at 33 kWh a day or less, your supplier is charging you the wrong rate. HMRC's own guidance is blunt about it: supplies of "not more than an average rate of 33 kilowatt hours per day, 1,000 kilowatt hours per month, of electricity to one customer at any one of the customer's premises are subject to VAT at the reduced rate", and "this applies whether the bill is based on a meter reading by either you or your customer or on an estimate".

That is the whole test. Not your trade, not your turnover, not whether you are VAT registered. Kilowatt hours through one meter.

The two minute check

Take the kWh figure from your bill and divide it by the number of days the bill covers. Under 33 and you are inside the de minimis limit. A quarterly bill is roughly 91 days, so the line you are looking for is about 3,000 kWh a quarter, or 1,000 a month, or 12,000 a year.

Who is usually under it: a one or two chair barbershop, a nail bar, a single treatment room, a small studio with lights and a sound system. Who is usually over it: any cafe with fridges and a three group espresso machine, any salon heating its backwash water electrically, any gym running air conditioning through the summer.

Hairdressing sits right on the line, which is exactly why it is worth checking rather than assuming. Dryers and straighteners are intermittent. An electric water heater running all day is not, and that one appliance is often the difference.

Two things that catch people out. First, the limit is per premises, so two shops are two separate tests. Second, gas has its own, much higher limit (4,397 kWh a month) and gas is not part of the October change, so a qualifying gas supply stays at 5% throughout.

What it is actually worth, told honestly

Here is the part most write-ups skip, and it decides whether this page is worth anything to you.

If you are VAT registered and fully taxable, VAT on your electricity is input tax. You reclaim it. Being charged 20% instead of 5% cost you timing, not money, and 5% going to 0% saves you nothing at all. Do not let anyone sell you a "VAT reclaim" on that basis.

If you are not VAT registered, which below the £90,000 threshold is a genuine choice many solo barbers, mobile therapists and single room clinics make, the VAT on your electricity is a cost like any other. Then the gap between 20% and 5% is fifteen pence in every pound of your net bill, and it has been coming out of your take-home pay.

Say your electricity costs £3,000 a year before VAT. That is an assumption to make the arithmetic readable, not a benchmark, so use your own figure. At the wrong rate you paid £600 of VAT. At the right one you paid £150. The £450 difference is the same £450 you would have to sell roughly fifteen extra cuts to earn.

The levy nobody reads

There is a second line, and this one costs money whether you are VAT registered or not, because it is a levy rather than a reclaimable tax.

Climate Change Levy runs at 0.801 pence per kilowatt hour for electricity from 1 April 2026, rising to 0.827 pence from 1 April 2027. HMRC's guidance on fuel and power says plainly that the levy "does not apply to taxable commodities used by domestic consumers, or by charities for non-business use" and that "supplies of small amounts of energy (de minimis) are also excluded".

So if you are under 33 kWh a day and there is a CCL line on your bill, that is wrong too. At the very top of the de minimis range, 12,000 kWh a year, the levy is about £96 a year. Not life changing. But it is £96 of pure margin, it repeats every year, and you also pay VAT on top of it, because HMRC treats the levy as part of the value of the supply.

Four years behind you, and who has to fix it

If you have been overcharged, the route is not HMRC. HMRC says so in as many words: "if you think you've been wrongly charged an amount as VAT by your supplier, this is a commercial matter. You should seek a refund from your supplier."

The supplier then reclaims from HMRC to reimburse you, and that claim is capped at four years. There is a protection built in for you here worth knowing about: HMRC will not pay a supplier's claim where the supplier passed the charge to a customer who bore it and "are unable, or do not intend, to pass on to them any repayment resulting from the claim". In plain terms, the supplier cannot pocket it.

So the email to your supplier is short. Give them the meter point number, the consumption per day over the last few bills, quote paragraph 5.2 of VAT Notice 701/19, and ask them to correct the rate going forward and backdate it as far as the four year limit allows. Ask about the Climate Change Levy line in the same message.

Diary note: 1 April 2027

The zero rate is temporary. It runs to 31 March 2027 and then qualifying electricity in Great Britain goes back to 5%. Northern Ireland never leaves 5% at any point, so if your premises is in Belfast none of the October change applies to you, though the de minimis rule itself still does.

On the same day the levy steps up to 0.827 pence. If you build the next six months of cash flow assuming zero VAT on power is now normal, April will be a small unpleasant surprise on top of whatever your contract does.

Why a buyer cares about a boring billing line

A one off refund is not worth anything at sale. Any competent buyer strips one offs out when they rebuild your SDE, and a four year VAT correction is the most one off thing on the page.

The permanent correction is different. Getting the rate and the levy right every month from now on lifts your net margin by a small, boring, entirely repeatable amount, and repeatable is the only kind of profit that gets multiplied.

There is a quieter signal too. When a buyer's accountant finds four years of a supplier charging the wrong VAT rate on an unchallenged direct debit, they do not conclude you were unlucky. They conclude nobody was reading the bills, and they start opening the other ones. Clean books are partly about the numbers being right, and partly about the buyer believing you would have noticed if they were not.