The Energy Observer August 2026

VAT removed from domestic electricity bills – What could it mean for small businesses?

The UK Government has announced that VAT on domestic electricity bills will be removed from 1 October 2026, reducing the rate from 5% to 0% and saving a typical household around £45 per year. [gov.uk], [theguardian.com]

While the change is aimed at households, there are several indirect implications for small businesses:

1. More consumer spending power

Lower household energy bills could leave consumers with slightly more disposable income during the winter months. For small businesses in retail, hospitality, leisure and personal services, even modest increases in consumer confidence can support spending. [gov.uk], [theguardian.com]

Energy Observer angle: "A small reduction in household energy costs may provide a welcome boost to consumer spending, particularly during the traditionally busy Christmas trading period."

2. Renewed focus on business energy costs

The announcement may also prompt questions from business owners about the different VAT treatment between domestic and business energy supplies.

While most businesses can reclaim VAT if they are VAT registered, energy costs remain a significant operational expense. The move could reignite discussions around support for SMEs facing higher operating costs than households. This creates an opportunity for businesses to review their energy efficiency measures and procurement strategies.

3. Some small organisations may benefit directly

Certain organisations already qualify for reduced-rate energy VAT treatment, including some charities, care homes and businesses where energy is used primarily for domestic purposes. Some eligible small organisations may therefore see direct benefits from the changes. [moneypeopl...line.co.uk], [vatcalc.com]

4. Sustainability investment may become more visible

As policymakers continue to focus on energy affordability, businesses may look for longer-term ways to reduce costs through:

• Solar PV
• Battery storage
• EV charging
• Heat pumps
• Building efficiency improvements

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Billions in new finance for small businesses

In one of her final major announcements as Chancellor, Rachel Reeves unveiled a significant expansion of support for UK small and medium-sized businesses, aimed at helping firms access the finance they need to invest, grow and create jobs. [independent.co.uk], [gov.uk]

The centrepiece of the package is a major expansion of the Government-backed Growth Guarantee Scheme (GGS), which provides lenders with a 70% Government guarantee on loans to eligible businesses. Since launching in 2022, the scheme has already delivered more than £3.7 billion of finance to UK SMEs. Under the new plans, an additional £6.5 billion will be made available, with the British Business Bank estimating the changes could support around 33,000 businesses over the next three years. [independent.co.uk], [gov.uk]

The reforms also make the scheme more accessible by:

• Extending loan terms from six years to ten years.
• Increasing eligibility from businesses with a turnover of £45 million to £54 million.
• Expanding support for exporters, innovative businesses and community lenders. [independent.co.uk], [gov.uk], [startups.co.uk]

For small businesses, this is potentially one of the most significant finance announcements in recent years. Access to affordable funding is often cited as one of the biggest barriers to growth, particularly when businesses are looking to invest in new equipment, recruit staff, expand premises or fund sustainability projects. [gov.uk], [dailybusin...roup.co.uk]

Why it matters

While energy prices remain a key concern for many SMEs, access to capital can be just as important. Greater availability of Government-backed lending could help businesses invest in energy efficiency measures such as LED lighting, solar panels, battery storage, heat pumps and upgraded equipment that reduce long-term operating costs. [gov.uk], [startups.co.uk]

Could more north sea drilling help small businesses?

One of the UK's most debated energy topics is whether the Government should support more oil and gas development in the North Sea. While there is currently no confirmed return to issuing brand-new exploration licences, there has been speculation that the Government may look to speed up existing projects and allow further development of already licensed fields such as Rosebank and Jackdaw. [theguardian.com], [telegraph.co.uk]

For small businesses, the obvious benefit is jobs. The North Sea sector supports thousands of highly skilled roles across engineering, manufacturing, logistics, marine services and professional services, particularly in Scotland and the North East of England. Industry groups argue that continued investment would protect these jobs and support local supply chains. [theguardian.com], [worldoil.com]

However, when it comes to day-to-day energy bills for small businesses, the picture is less clear.

Would more drilling lower energy prices?

Many people assume that more UK oil and gas production would automatically reduce energy bills. In reality, oil and gas are largely traded on international markets, meaning prices are heavily influenced by global supply and demand, geopolitical events and commodity markets rather than where the fuel is produced. Some MPs and energy experts have argued that additional North Sea production would have little direct impact on household or business energy bills. [theguardian.com]

That said, supporters of North Sea development argue that increasing domestic production can improve energy security and reduce reliance on imported fuels, particularly during periods of global uncertainty. [theguardian.com], [worldoil.com]

Potential benefits for small businesses

If more North Sea projects go ahead, small businesses could benefit in several indirect ways:

• More skilled employment leading to stronger local economies and greater consumer spending.
• Increased demand for suppliers in sectors such as engineering, transport, construction, catering, accommodation and business services.
• Greater energy security, which may help reduce exposure to international supply shocks.
• Continued investment in UK energy infrastructure, supporting long-term economic activity. [theguardian.com], [worldoil.com]

For businesses located near energy hubs such as Aberdeen, the impact could be particularly significant as supply-chain activity often extends well beyond oil and gas operators themselves. [worldoil.com], [theguardian.com]

Potential drawbacks

There are also arguments against relying on increased drilling.

Critics suggest that new projects take many years to develop, meaning they offer limited help with today's energy costs. Environmental groups also argue that further fossil fuel development could slow the transition towards renewable energy sources. [theguardian.com], [londondaily.com]

In addition, uncertainty around future energy policy can affect business investment decisions. If governments alternate between supporting and restricting North Sea development, companies may delay investments in both traditional and low-carbon energy projects. [londondaily.com], [worldoil.com]

What does this mean for small businesses?

The most likely impact of increased North Sea drilling on small businesses is economic rather than immediate savings on energy bills. While the sector can support jobs, investment and local growth, most experts agree that any effect on electricity or gas prices is likely to be limited because UK energy prices are closely linked to global markets. [theguardian.com], [theguardian.com]

For small businesses, the bigger energy cost opportunities may still come from improving efficiency, investing in low-carbon technologies and taking advantage of future innovations in energy flexibility, storage and renewable generation.

Middle East tensions and the Strait of Hormuz: Why UK businesses are watching closely

Another story continuing to dominate energy markets is the ongoing conflict involving Iran and growing disruption around the Strait of Hormuz – one of the world's most important energy shipping routes. Around a fifth of global oil trade and a significant proportion of liquefied natural gas (LNG) shipments typically pass through the narrow waterway connecting the Persian Gulf to global markets. [cnbc.com], [telegraph.co.uk]

Recent attacks on commercial vessels, reduced shipping traffic and concerns about further escalation have caused oil markets to react sharply. In July, Brent crude oil prices climbed above $90 per barrel, as traders worried that supplies from the Middle East could be disrupted. [punchng.com], [gulfnews.com]

What does this mean for UK small businesses?

For most UK SMEs, the biggest impact is unlikely to be physical shortages of energy, but rather higher and more volatile prices.

The UK receives energy from a variety of sources and is less reliant on Middle Eastern oil and gas than some other countries. However, energy is traded globally, meaning events thousands of miles away can quickly influence wholesale prices closer to home. When oil and gas markets become nervous, prices often rise regardless of where the fuel originates. [gulfnews.com], [livemint.com]

Potential knock-on effects include:

• Higher transport and delivery costs.
• Increased manufacturing and production expenses.
• Upward pressure on inflation.
• More volatile energy procurement costs for businesses coming to the end of fixed contracts. [gulfnews.com], [theguardian.com]

Could there be supply problems?

At present, there is no indication that UK businesses face immediate energy shortages. Energy suppliers, governments and global markets have experience managing geopolitical disruptions, and alternative shipping routes and supply sources are available in many cases. Nevertheless, reduced shipping through Hormuz continues to be closely monitored by governments and energy companies worldwide. [cnbc.com], [cnbc.com]

Why EPCs matter for small businesses

If you run a small business from a commercial property, it's worth keeping an eye on Energy Performance Certificates (EPCs).

An EPC rates how energy efficient a building is, from A (most efficient) to G (least efficient). It can affect energy bills, property value and future compliance requirements. [coles-miller.co.uk]

The good news is that the Government's latest proposals are aimed mainly at larger commercial buildings. Properties under 1,000m² are expected to remain at the current minimum EPC rating of E, with no plans currently announced to increase this requirement. [coles-miller.co.uk]

Even so, improving your building's energy efficiency can bring real benefits. Simple measures such as switching to LED lighting, improving insulation or upgrading heating systems can help reduce energy costs and lower carbon emissions. [coles-miller.co.uk]

For small businesses, the message is simple: while major regulatory changes may not be around the corner, investing in energy efficiency can still save money and support your sustainability goals. [coles-miller.co.uk]

Find out more: https://www.coles-miller.co.uk/blog/commercial-epc-changes [coles-miller.co.uk]