Temporary zero rate of VAT for domestic electricity confirmed

24 September 2026| CATEGORIES: domestic electricity, VAT rates, zero rate| TAGS: domestic electricity, energy suppliers, HMRC, VAT rate cut, zero rate

Following the Government’s announcement on 21 July 2026, legislation introducing a temporary zero rate of VAT for qualifying supplies of domestic electricity in Great Britain has now been made. The Value Added Tax (Supplies of Domestic Electricity) Order 2026 (SI 2026/987) will come into force on 1 October 2026.

The temporary zero rate will apply to qualifying supplies from 1 October 2026 to 31 March 2027, replacing the current 5% reduced rate. The measure applies to Great Britain only; there is no change to the VAT treatment of qualifying supplies in Northern Ireland, which will remain subject to the 5% reduced rate.

We previously reported on the Government’s announcement in our article, “Domestic Electricity to be Zero-rated”. HMRC has now published Revenue & Customs Brief 10 (2026) and updated VAT Notice 701/19 – Fuel and power, providing further guidance on how the temporary zero rate will operate, including the treatment of billing periods that span the change in VAT rate.

The temporary measure does not change the existing rules determining which supplies of electricity qualify for the reduced rate. Instead, qualifying supplies in Great Britain will move from 5% to 0% for the six-month period. Businesses supplying or purchasing electricity should therefore consider how the change will affect their VAT treatment, billing arrangements and systems ahead of 1 October 2026.

What is changing?

Currently, supplies of electricity for qualifying domestic and other qualifying use are generally subject to VAT at the reduced rate of 5%.

From 1 October 2026, qualifying supplies of electricity in Great Britain will instead be subject to VAT at 0%. The zero rate will apply until 31 March 2027.

The measure applies only to electricity. Other types of fuel and power are not affected by the change.

The temporary zero rate applies in England, Scotland and Wales. Qualifying supplies of electricity in Northern Ireland will remain subject to VAT at 5%.

Which supplies qualify for the zero rate?

There is no change to the supplies of electricity that qualify for relief as a result of the temporary measure.

Qualifying use includes:

• electricity supplied for domestic use;
• electricity supplied for a charity’s non-business use; and
• certain supplies within the existing de minimis limits.

Where a supply is partly for qualifying use and partly for other purposes, the existing rules continue to determine the VAT treatment, including the 60% qualifying-use rule.

Supplies of electricity which do not qualify for the reduced rate remain standard-rated at 20%.

Businesses should therefore continue to refer to VAT Notice 701/19 – Fuel and power when determining whether a particular supply qualifies for the relief.

Billing periods spanning 1 October 2026

One of the key practical issues for energy suppliers will be dealing with billing periods that span the introduction of the zero rate.

HMRC has confirmed that, where a billing period includes 1 October 2026, suppliers may determine the VAT liability based on the date on which the electricity is consumed.

HMRC recommends that suppliers use meter readings to establish the proportion of electricity supplied before and after 1 October and therefore the amount subject to 5% VAT and 0% VAT respectively.

However, other methods may be used where they produce a fair and reasonable outcome.

Suppliers should keep clear records supporting the method used and account for any subsequent adjustments in accordance with the normal VAT accounting rules.

This will be particularly relevant where customers receive bills covering consumption both before and after 1 October 2026, including where actual meter readings are not available at the date of billing.

What does this mean for energy suppliers?

Although the change is temporary and the underlying rules governing qualifying use remain unchanged, energy suppliers will need to ensure that their systems and processes can correctly apply the different VAT rates during the transition.

Businesses should consider:

• updating billing, ERP and accounting systems to apply the 0% rate from 1 October 2026;
• ensuring the correct VAT treatment is applied to consumption before and after the change;
• reviewing the treatment of estimated meter readings and subsequent reconciliations;
• ensuring credit notes, refunds and billing adjustments are treated correctly;
• reviewing VAT reporting and Making Tax Digital processes;
• updating invoice formats and customer communications; and
• maintaining appropriate records to support the VAT treatment applied.

Suppliers should also consider how the temporary nature of the measure will be managed, given that the reduced rate is scheduled to return from 1 April 2027.

Impact on businesses and other organisations

The temporary zero rate only applies to qualifying supplies of electricity. Electricity supplied for non-qualifying business use will remain subject to VAT at the standard rate of 20%. HMRC confirms that fuel and power are generally standard-rated unless the supply falls within the qualifying-use rules.

For businesses purchasing electricity for taxable business activities, VAT charged on their electricity supplies will generally be recoverable as input tax, subject to the normal rules. The temporary zero rate will therefore primarily affect businesses where the electricity supplied qualifies for the relief, rather than businesses consuming electricity wholly for non-qualifying purposes.

The change may also be relevant to organisations that recharge or onward supply electricity to residential customers or other qualifying users. This could include, for example, landlords, residential park operators, student accommodation providers, care homes and other organisations where electricity is supplied as part of wider arrangements.

Such businesses should review their billing arrangements and consider whether the change affects the VAT treatment of amounts charged to customers. Particular care may be required where electricity is supplied for both qualifying and non-qualifying use, as the VAT treatment may need to be apportioned. HMRC’s existing rules provide that where less than 60% of a supply is for qualifying use, the qualifying-use element is reduced-rated and the remaining element is standard-rated.

Northern Ireland

The temporary zero rate does not extend to Northern Ireland.

Qualifying supplies of electricity in Northern Ireland will continue to be subject to the 5% reduced rate.

Businesses operating across Great Britain and Northern Ireland will therefore need to ensure that their systems distinguish between the different VAT treatments applying in the two territories.

What should businesses do now?

With the zero rate due to take effect on 1 October 2026, affected businesses have a short period in which to complete their implementation work.

Energy suppliers and other businesses involved in the supply or billing of qualifying electricity should:

• review the legislation and HMRC guidance;
• confirm which supplies within their customer base qualify for the zero rate;
• test billing and accounting systems;
• determine how billing periods spanning 1 October will be apportioned;
• ensure appropriate meter-reading and estimation processes are in place; and
• review customer communications and VAT reporting processes.

Businesses should also consider the impact of the return to the 5% rate from 1 April 2027 when designing their systems and processes.

How RBC VAT can help

Changes to VAT rates can create practical challenges, particularly where businesses need to distinguish between supplies made before and after the effective date.

RBC VAT can assist businesses in assessing the VAT treatment of electricity supplies, reviewing transitional arrangements and supporting the implementation of the new VAT rate across billing, accounting and reporting systems.

If you would like to discuss how the temporary zero rate may affect your business, please get in touch with a member of our team.