The bill amends the Value Added Tax Act 1994 to create a new Group 17 in Schedule 9 that exempts supplies of electricity, oil and gas when used for domestic purposes or by charities outside the course of business. It lists the types of fuels covered, excludes certain excise‑charged fuels, and sets out rules for partial supplies and deemed domestic supplies.
This matters because it converts a portion of household energy spending from a taxed to an exempt supply. That lowers costs for qualifying consumers but shifts administrative burdens to suppliers and HMRC and reduces Treasury receipts.
The measure relies on bright‑line thresholds and technical definitions that will drive billing, metering and compliance work across the energy and fuel supply chain.
At a Glance
What It Does
The bill inserts a new Group 17 into Schedule 9 of the VAT Act 1994 to exempt supplies of specified gases, liquid hydrocarbons, fuel oils and electricity when used for "qualifying use" (domestic or non‑business charity use). It defines the fuels covered, excludes fuels subject to excise duties, and prescribes rules for partial supplies and deemed domestic supplies.
Who It Affects
Household energy consumers, charities that consume energy but not in the course of business, energy and fuel suppliers and distributors, meter operators and HMRC will be directly affected. Landlords, residential care and student accommodation operators, and caravan/houseboat owners will also see practical effects on billing and accounting.
Why It Matters
The change shifts a recurring household cost out of the VAT base, reducing consumer bills for qualifying use while lowering VAT receipts. It creates compliance and billing challenges because suppliers must apply thresholds, apportion supplies, and maintain records to support exempt treatment; it also alters the interaction between VAT and excise regimes.
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What This Bill Actually Does
The bill creates a targeted VAT exemption for household energy by inserting a new Group 17 into Schedule 9 of the Value Added Tax Act 1994. It lists the categories of supply that qualify—types of manufactured gases, petroleum gases, fuel oil/gas/kerosene and electricity—and then restricts the exemption to "qualifying use," defined as domestic consumption or non‑business use by charities.
The text deliberately separates fuels that are already subject to excise duties (for example road fuels) from those meant to be covered by the exemption.
Practical rules in the Group decide when a supply is treated as domestic: some supplies are automatically deemed domestic if they fall below numeric thresholds (for example for piped gas and electricity) or match storage and container conditions for liquefied petroleum gas and kerosene. Where a single supply serves both qualifying and non‑qualifying uses, the bill treats the entire supply as exempt if at least 60% is for qualifying use; otherwise the supplier must apportion the supply.The definition of domestic use covers ordinary dwellings and several categories of residential accommodation—care homes, student halls, armed forces accommodation, monasteries, self‑catering holiday lets, caravans and houseboats—while expressly excluding hospitals, prisons and hotels from the listed “relevant residential” examples.
The bill also places on the Treasury an express duty to use its existing power under the VAT Act to make consequential changes to the reduced‑rate schedule, and it sets a single commencement date nationwide.
The Five Things You Need to Know
The bill adds a new Schedule 9 Group 17 to the VAT Act 1994 to exempt domestic supplies of specified gases, liquid hydrocarbons, fuel oil/kerosene and electricity.
"Qualifying use" is limited to domestic consumption or use by a charity outside the course of a business; commercial and business uses remain taxable.
Certain supplies are automatically treated as domestic if they fall below fixed thresholds—piped gas at or below 150 therms/month (or 4,397 kWh/month measured in kWh) and electricity at or below 1,000 kWh/month—and other caps apply to cylinder size, bulk storage and fuel volumes.
If a supply is mixed use and at least 60% of it is for qualifying use, the bill treats the entire supply as for qualifying use; otherwise the supplier must apportion exempt vs taxable elements.
The Treasury must exercise its power under section 29A(3) of the VAT Act 1994 to make consequential amendments to the reduced‑rate schedule; the bill comes into force on 1 April 2026 and extends to all UK nations.
Section-by-Section Breakdown
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Creates the new VAT exemption category for domestic energy
This provision inserts a new Group 17 into Schedule 9, listing the kinds of fuel and electricity that can qualify for exemption when used for domestic purposes. It is the core legal change: instead of relying on a reduced rate or ad hoc arrangements, the bill establishes an explicit exemption category within the principal VAT statute. Operators and advisers will need to map existing supply chains and tariff codes to the Group 17 list to determine which products fall inside the exemption.
What fuels are covered and what is excluded
Item 1 enumerates covered supplies (coal/producer gases, petroleum gases, fuel oils/kerosene, electricity). The Notes carve out fuels already subject to excise—road fuel gas and hydrocarbon oils taxed under the Hydrocarbon Oil Duties Act 1979—so the exemption does not override excise treatment. The detailed statutory definitions of "fuel oil", "gas oil" and "kerosene" mirror excise terminology, so suppliers will need to reconcile VAT classification with excise classifications and declarations (for example rebated kerosene rules).
Who qualifies, deemed domestic supplies, and partial‑use rules
The Group defines "qualifying use" as domestic use or charity non‑business use, lists specific circumstances where supplies are always domestic (piped gas below a set consumption rate, electricity below a kWh threshold, small LPG cylinders, limited bulk storage and small volume fuel oil deliveries), and prescribes an apportionment rule for mixed supplies. The 60% bright‑line for treating a whole supply as qualifying is administratively significant: it reduces small apportionments but creates large consequences at the threshold. Suppliers will need meter data, delivery records and storage information to support exempt treatment.
Consequential amendments and Treasury action
The bill obliges the Treasury to exercise its statutory power under section 29A(3) of the VAT Act 1994 to amend Schedule 7A (reduced‑rate provisions) as a consequence of the new exemption. That delegates implementation work to the Treasury rather than prescribing exact technical drafting for reduced‑rate items; it also means Treasury Ministers must produce secondary instruments or guidance to align the reduced‑rate list and transitional arrangements with the new exemption.
Extent, commencement and short title
This short clause confirms the Act would apply across England, Wales, Scotland and Northern Ireland and sets a single commencement date of 1 April 2026. For practitioners the key practical implication is the fixed start date: systems changes, billing updates and customer communications will need to be scheduled well in advance to ensure correct treatment from that date.
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Explore Finance in Codify Search →Who Benefits and Who Bears the Cost
Every bill creates winners and losers. Here's who stands to gain and who bears the cost.
Who Benefits
- Household energy consumers — Lower VAT on qualifying energy reduces out‑of‑pocket costs for residential electricity and specified fuels, with the largest gains to households that fall within the deemed supply thresholds or otherwise clearly qualify as domestic users.
- Low‑usage households and micro‑consumers — The deemed supply thresholds (metered caps and cylinder/bulk limits) are calibrated to capture lower levels of consumption, so off‑grid households and those with small‑scale LPG or kerosene use stand to benefit without complex proofs.
- Charities using energy non‑commercially — Charities that consume energy for non‑business activities (for example charity‑run shelters or community homes) may claim exempt treatment, lowering operating costs for qualifying premises.
- Residential accommodation providers — Operators of care homes, student halls, armed forces accommodation, caravan parks, and houseboat owners will find certain energy supplies treated as exempt when the end use matches the bill’s definitions, which can reduce resident charges or operating expenses.
Who Bears the Cost
- HM Treasury — Foregone VAT receipts from exempted household energy will reduce tax revenue unless offset elsewhere; Treasury also bears the administrative cost of drafting consequential amendments and guidance.
- Energy suppliers, fuel distributors and retailers — Firms must update billing systems, change VAT accounting, implement collection of qualifying evidence and apportion supplies where mixed; these IT and process costs can be substantial, especially for smaller suppliers.
- HMRC — The department must issue guidance, manage transition, and police misuse or misclassification. The need to audit consumption thresholds and storage declarations increases enforcement resource requirements.
- Charities and landlords with mixed uses — Entities that mix business and non‑business activities (for example charities running income‑generating services in the same premises, or landlords with both domestic and short‑let units) will face compliance complexity in proving which uses qualify.
Key Issues
The Core Tension
The central tension is between targeted consumer relief and a workable tax administration: the bill aims to remove VAT on household energy to reduce bills, but doing so without undermining the integrity and simplicity of the VAT system requires detailed thresholds, exclusions and recordkeeping that can reintroduce complexity and enforcement costs that partly offset the consumer benefits.
The bill trades a simple headline—"exempt household energy from VAT"—for a fairly complex set of bright‑line rules that shift administrative work onto suppliers and HMRC. Thresholds and container/storage tests (metered caps, cylinder weights, two‑tonne storage limits, 2,300 litre fuel deliveries) are necessary to target the relief, but they create cliff edges where a marginal change in consumption flips an entire supply between taxable and exempt.
Those cliff edges raise risks of customer confusion, gaming (splitting deliveries or shifting meters), and costly disputes about where the use sits on a given day.
The interaction with excise law and existing rebated fuel regimes is awkward. The bill explicitly excludes excise‑charged road fuels and some hydrocarbon oils, and it references declarations used in excise contexts; suppliers moving between excise and VAT regimes will need clear rules to avoid double relief or unintended denials.
The 60% rule for mixed supplies simplifies minor mixed uses but invites record‑intensive approaches where usage sits near the cutoff. Finally, the bill leaves consequential technical detail to Treasury action under section 29A(3) — which is sensible for flexibility but creates uncertainty about the final shape of the reduced‑rate map, transitional treatment for existing contracts, and whether secondary legislation will provide for refunds or credits for past periods.
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