Domestic Electricity to be Zero-rated

24 July 2026| CATEGORIES: domestic electricity, VAT rates, zero rate| TAGS: domestic electricity, VAT rate cut, zero rate

The UK Government has announced plans to remove VAT from domestic electricity bills from 1 October 2026 as part of a package of measures intended to ease household cost of living pressures. If implemented, qualifying domestic electricity supplies will become zero-rated for VAT purposes, replacing the current reduced rate of 5%.

The measure is expected to reduce the average household electricity bill by around £45 per year, although the precise saving will depend on individual consumption.

While the proposal is primarily aimed at supporting consumers, it will also require energy suppliers to implement significant VAT and systems changes. Businesses involved in the supply or billing of electricity should therefore begin considering the practical implications well in advance of the proposed implementation date.

The current VAT treatment

At present, supplies of electricity for qualifying domestic and charitable non-business use are subject to the reduced rate of VAT (5%). Commercial supplies generally remain subject to VAT at the standard rate.

The Government has announced its intention to reduce the VAT rate on qualifying domestic electricity supplies from 5% to 0% from 1 October 2026, subject to the necessary legislation being introduced.

Although consumers will no longer bear VAT on qualifying electricity bills, the supplies will remain taxable supplies for VAT purposes. This means suppliers should continue to retain the right to recover input tax incurred on costs directly attributable to making those supplies.

Who will benefit?

Based on the announcement, the proposed zero rate will apply to qualifying domestic electricity supplies.

At the time of writing, there has been no indication that the following will change:

• the VAT treatment of domestic gas supplies;
• the VAT treatment of business electricity supplies; or
• the existing qualifying conditions for domestic and charitable non-business use.

Further detail is expected once draft legislation and HMRC guidance are published.

What about Northern Ireland?

The position in Northern Ireland is more complex. Under the post-Brexit arrangements, EU VAT rules continue to apply in Northern Ireland in relation to goods, including electricity. As a result, the Government has acknowledged that agreement with the EU would be required before the proposed zero rate could be introduced for domestic electricity supplies in Northern Ireland.

To ensure households in Northern Ireland receive equivalent support as quickly as those in Great Britain, the Government has instead announced that the Northern Ireland Executive will receive comparable funding to enable it to provide cost of living support for households in Northern Ireland. Further details of how this funding will be delivered are expected in due course.

Practical considerations for energy suppliers

Although changing a VAT rate may appear relatively straightforward, implementing the change is likely to involve a considerable amount of preparation.

Energy suppliers should consider:

• updating billing, ERP and accounting systems;
• ensuring invoices issued on or after the implementation date apply the correct VAT treatment;
• reviewing customer communications and invoice formats;
• the treatment of estimated bills, reconciliations, credit notes and refunds;
• ensuring VAT reporting and Making Tax Digital processes correctly reflect the revised VAT rate; and
• reviewing contracts and pricing arrangements where VAT clauses may be affected.

Particular attention should also be paid to the transitional rules for billing periods spanning 1 October 2026. These rules will determine how VAT should be accounted for where electricity is supplied before and after the effective date or where invoices are issued in advance.

Wider VAT implications

For most VAT-registered businesses, the proposal is unlikely to have a significant financial impact because VAT incurred on business electricity is generally recoverable as input tax.

However, organisations supplying electricity to residential customers—including landlords, residential park operators, student accommodation providers and care home operators—should review whether any of their billing arrangements or VAT processes may require amendment once the detailed legislation is available.

The announcement also serves as a reminder that even a seemingly simple VAT rate change can have far-reaching operational consequences, requiring updates across finance, billing, IT and customer service functions.

What happens next?

The proposal will require legislation before it takes effect. Businesses should therefore continue to monitor developments and review any draft legislation and HMRC guidance as these become available, particularly in relation to the detailed scope of the relief and the transitional provisions.

Given the proposed implementation date of 1 October 2026, businesses affected by the change should begin planning early to ensure sufficient time for systems testing, process changes and staff training.

How RBC VAT can help

Changes to VAT rates often involve more than simply updating an accounting code. They can affect invoicing, contracts, VAT reporting, systems configuration and customer communications.

RBC VAT has extensive experience supporting businesses through VAT legislative changes and can assist with reviewing the VAT implications of the proposed zero rate, assessing transitional issues and helping to ensure systems and processes are ready ahead of implementation.

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