VAT on solar panels for business: rates, reclaims and finance routes

VAT on solar panels for business: the short answer

VAT on solar panels for business turns on two questions: what kind of building the panels go on, and what the VAT position of the business paying for them is. Panels installed on business premises such as offices, shops, factories, warehouses and farm buildings are charged at the standard rate of VAT, currently 20%. The 0% rate that households read about comes from HMRC's VAT Notice 708/6 on energy-saving materials, and it covers only installations in residential accommodation and, since 1 February 2024, in buildings intended for use solely for a relevant charitable purpose. A VAT-registered business that uses the panels for its taxable business can normally reclaim the 20% as input tax on its VAT return. A business that is not registered, or that makes exempt supplies, carries some or all of the VAT as a cost.

So someone searching for VAT on solar panels for a home and someone buying for a business get different answers. A home installation is zero-rated until 31 March 2027. A commercial installation is standard-rated, and the real questions for the business are whether it can get that VAT back, when, and how the way it pays changes the timing. This guide answers them from the VAT Act and from HMRC's own notices, manuals and briefs.

The rate a business pays on commercial premises

Most goods and services in the UK are charged at the standard rate, currently 20%. The relief for energy-saving materials is a specific exception, written into the VAT Act 1994 as Group 23 of Schedule 8, and its scope is narrow. The law zero-rates services of installing energy-saving materials in residential accommodation, or in a building intended for use solely for a relevant charitable purpose, together with the materials themselves when they are supplied by the person who installs them. Solar panels are on the statutory list of energy-saving materials, and HMRC's notice describes them as including photovoltaic panels with their cabling, control panel and AC/DC inverter.

Business premises are not residential accommodation, and a building used in the course of a business is not used for a relevant charitable purpose, so the relief does not reach them and the installer should charge 20%. The notice also names buildings that people sometimes assume qualify: the standard rate applies to installations in hospitals, prisons or similar institutions, and in hotels, inns or similar establishments. A care home or a block of student rooms can qualify, as the next section explains, but a hotel cannot, however residential it feels.

The zero-rate period and April 2027

The zero rate is time-limited by statute. For residential accommodation in England, Wales or Scotland it applies to supplies made on or after 1 April 2022 and before 1 April 2027. In Northern Ireland it began on 1 May 2023, and the current version of Notice 708/6 covers installations made between 1 May 2023 and 31 March 2027. From 1 April 2027 those installations revert to the reduced rate of 5%. The change affects residential accommodation and qualifying charitable buildings only. A business installing panels on its own commercial premises pays 20% before and after that date, so April 2027 is no reason to rush or delay a commercial project.

Where a business customer still gets 0%

The relief follows the building, not the customer. A company, partnership or sole trader that installs panels in residential accommodation gets the same zero rate a householder would. In the statute, residential accommodation means a building, or part of a building, that consists of a dwelling or a number of dwellings, a building or part of a building used for a relevant residential purpose, a caravan used as a place of permanent habitation, or a houseboat. HMRC's notice turns that into a list:

• houses, blocks of flats or other dwellings
• armed forces residential accommodation
• children's homes
• homes providing care for the elderly, disabled people, or people who suffer or have suffered from drug or alcohol dependency or mental disorder
• hospices
• institutions that are the sole or main residence of at least 90% of their residents
• monasteries, nunneries and similar religious communities
• residential accommodation for students or pupils
• self-catering holiday accommodation
• caravans used as a place of permanent habitation, such as park homes
• houseboats and other boats that meet HMRC's conditions for permanent habitation or use as a sole or main residence

Four entries on that list matter to businesses. A landlord fitting panels to let houses or flats is installing in dwellings. A care home operator, and a provider of residential accommodation for students, are installing in residential accommodation. And a business that runs self-catering holiday accommodation is installing in residential accommodation even though it is trading. Serviced accommodation is the contrast. Notice 708/6 does not define a similar establishment, but HMRC's hotels notice treats guesthouses, bed and breakfast establishments, hostels and serviced flats (other than those for permanent residential use) as establishments similar to hotels, and installations in hotels, inns and similar establishments are standard-rated. The guide to VAT on solar panels on a mixed-use building works through these cases, including buildings that are only partly residential.

Charity buildings

From 1 February 2024 the relief was extended to buildings intended for use solely for a relevant charitable purpose. That means use by a charity otherwise than in the course or furtherance of a business, or as a village hall or similarly in providing social or recreational facilities for a local community. The installer should take reasonable steps to make sure the customer will use the building that way, for example by asking for a letter confirming the intended use, but no certificate is needed for this relief. The word "solely" does the work. HMRC's construction notice, which Notice 708/6 points to for more on these buildings, warns that activities that make no profit, or whose profit only furthers the charity's aims, can still be business activities. It lists school buildings where a fee is charged for education as typically used for business, and places of worship as typically not. A charity building with real business use may therefore fall outside the relief and be standard-rated.

New dwellings

A developer or contractor building new homes is in a different position. If energy-saving materials are installed during the course of construction of a new dwelling, the supply is zero-rated, covering both the construction of the building and the installation of the energy-saving materials. The construction rules are in HMRC's Notice 708, which a business building homes should read alongside Notice 708/6.

Batteries

From 1 February 2024, electrical storage batteries installed in residential accommodation, or in buildings intended for use solely for a relevant charitable purpose, qualify for the temporary zero rate. That includes a battery retrofitted to existing panels and a standalone battery that stores electricity from the grid. The statute adds a condition: the battery must be intended for use solely for storing energy converted from electricity supplied to the accommodation or building in question, or generated by a microgeneration system. A battery fitted as part of a solar installation will normally be ancillary to it and form part of a single zero-rated supply. On commercial premises the relief does not apply, so the battery is standard-rated like the panels.

Materials without installation

The relief is for installation. Energy-saving materials supplied without installation are standard-rated, and a sale by a retailer is always standard-rated. A business that buys panels and has its own staff fit them pays 20% on the materials, even if they go on a house.

Reclaiming the VAT

Who can reclaim

A VAT-registered business can reclaim VAT on items it buys for use in its business, through its VAT return. If the items are also for personal use, only the business proportion of the VAT can be claimed. The business must keep records that support the claim and show how it worked out any business proportion, and it must hold valid VAT invoices. It cannot reclaim VAT on goods and services it uses to make VAT-exempt supplies. HMRC's Business Income Manual makes a point that matters for something as large as a solar array: the VAT on plant is reclaimed at the time of purchase, not spread over the life of the plant.

When to reclaim, and the 4-year limit

Input tax can be claimed once the business has both incurred it and received the associated VAT invoice. If the invoice had not arrived in the period the VAT was incurred, the claim goes on a later VAT return, within a 4-year time limit. For under-claimed input tax that limit runs 4 years from the due date of the return for the period in which the error occurred. If the business held the evidence in the period and simply did not claim, HMRC treats that return as being in error, and it is put right under the error correction rules in Notice 700/45.

Partly exempt businesses

A business that sells a mixture of taxable and exempt goods or services is partly exempt and cannot reclaim all of its input tax. Generating electricity for the whole business is an overhead, and Notice 706 calls input tax on purchases used to make both taxable and exempt supplies, overheads included, residual input tax. Under the partial exemption standard method the recoverable share of residual input tax is the value of taxable supplies in the period divided by the total value of supplies, both excluding VAT, multiplied by 100, and the result is normally rounded up to the next whole number. A business whose exempt input tax is small may still recover it all: it is treated as fully taxable if its exempt input tax is not more than £625 a month on average and not more than half of its total input tax, and both conditions must be met.

Businesses that are not registered

Registration is compulsory once total taxable turnover for the last 12 months goes over £90,000, or is expected to go over £90,000 in the next 30 days, and a business below the threshold can choose to register voluntarily. Until a business is registered, VAT on the installation is part of its cost. After registration it can reclaim VAT on goods bought within 4 years before registration that it still has, and on services bought within 6 months before registration, as long as the purchases relate to the taxable goods or services the registered business supplies.

Which of those time limits a supply-and-fit solar contract falls under is not settled by the guidance quoted here. HMRC says the normal VAT rules decide whether a supply is of goods or services, and its own example treats a builder's extension to business premises, supplied with all materials, as a supply of services. Check with an accountant before relying on the four-year window.

Flat Rate Scheme users

A business on the Flat Rate Scheme cannot reclaim VAT on its purchases, with one exception: it can reclaim the VAT on a single purchase of capital expenditure goods where the purchase, including VAT, costs £2,000 or more, and it claims that VAT outside the flat rate calculation. The exception does not cover services, so the goods-or-services question above decides whether a solar installation qualifies. HMRC's examples help: an item bought on hire purchase counts as capital expenditure goods because ownership will eventually transfer, while an item leased or hired counts as one continuous supply of services. A business that expects to buy an asset covered by the Capital Goods Scheme must leave the Flat Rate Scheme and tell HMRC immediately.

Cash accounting users

Under the Cash Accounting Scheme a business can only reclaim the VAT on its purchases once it pays its supplier, rather than when it receives the invoice. Goods bought under lease purchase, hire purchase, conditional sale or credit sale agreements are excluded from the scheme and are accounted for under the normal rules. A business can join if it expects taxable supplies of £1.35 million or less in the next year, and can stay until they reach £1.6 million.

VAT on each way of paying

The finance route does not change the VAT rate. It changes who supplies the system to the business, when the VAT is charged and when it can be reclaimed.

Route	Who supplies the business	When the VAT arises	Finance charges
Cash or loan	The installer	On the installer's invoice for the full price	Loan interest is exempt
Hire purchase	The finance company	On the cash price, at the time of supply	Exempt if charged separately and disclosed
Lease	The lessor	On each rental	Leasing is not an exempt financial service
Power purchase agreement	The PPA provider	On each electricity bill	None: the business buys electricity

Cash purchase and business loans

Where a business buys outright, or borrows to pay, the installer supplies the system directly to the business and its invoice carries VAT on the full selling price. HMRC's guidance is explicit that a loan does not change this: the installer is supplying the customer even if the finance company pays the installer direct, and the credit contract between the customer and the lender is a completely separate transaction. The lender's charge for the loan, usually described as interest, is an exempt supply, so there is no VAT on it. See buying the system outright and the business solar loan guide.

Hire purchase

Hire purchase is an agreement for the hire of goods for periodic payments, where the hirer has the option to purchase. The finance company takes title to the goods, so the installer supplies them to the finance company, and the finance company supplies both the goods and the credit to the business. The credit is exempt where a separate charge for it is made and disclosed, and the goods are taxable on the cash price stated in the agreement, before any deposit is deducted. The full amount of VAT on the goods is accounted for at the time of supply, usually when the goods are delivered. For the business, that means the VAT arrives at the start rather than across the instalments, and a fully taxable business holding a valid VAT invoice can reclaim it on the return for that period while it pays the instalments over the term. One trap: HMRC says some PCP-style contracts are described as hire purchase, and where one ends with an optional payment set, at the outset, at or above the asset's anticipated open market value, it is treated as leasing and the full value of each instalment is taxable. See hire purchase for solar and asset finance.

Leases

Equipment leasing is not an exempt financial service, and HMRC's Flat Rate Scheme notice gives a leased or hired van as an example of one continuous supply of services, because ownership never transfers. For continuous supplies a tax point is created every time the lessor issues a VAT invoice or receives a payment, whichever happens first, so VAT comes on each rental. Where a lessor issues one invoice covering several payments, or showing the monthly payments due for the year ahead, the business can only reclaim the VAT on each payment on the date it is due or the date it is paid, whichever is first. See operating leases for solar.

Power purchase agreements

Under a power purchase agreement the business pays for electricity rather than equipment, and HMRC treats a supply of power as a supply of goods. Fuel and power are standard-rated unless they qualify for the reduced rate. Qualifying use means domestic use or charity non-business use. Small supplies within the de minimis limit, not more than an average of 33 kWh a day or 1,000 kWh a month to one customer at any one of its premises, are always treated as domestic use, even when the customer is a business. Where premises are partly for qualifying use, the whole supply is treated as qualifying if 60% or more is for qualifying use; below 60% the supply is split between the two rates, and the supplier should hold a certificate from the customer stating the percentage. For a business using PPA electricity in its own operations above the de minimis limit the rate is 20%, and a VAT-registered business reclaims it from each bill under the normal rules. Electricity supplied under metered arrangements for consumption at business premises is outside the wholesale reverse charge, so the PPA provider normally charges the VAT in the ordinary way.

The temporary 0% on electricity

A temporary zero rate applies to qualifying supplies of electricity in Great Britain from 1 October 2026 to 31 March 2027, while in Northern Ireland qualifying supplies stay at 5%. It covers domestic supplies and other supplies of qualifying use. It does not reach a business's ordinary electricity, which stays at 20%, so it has no place in a business savings forecast for PPA power.

Energy as a service

Payments under energy as a service contracts need reading line by line, because one contract may combine equipment, maintenance and electricity. HMRC's fuel and power notice draws the relevant line for mobile generators: the liability depends on whether the supplier is hiring out the machine or supplying the electricity itself, and the hire of a generator for operation by the customer is standard-rated. HMRC's energy-saving notice explains how it decides whether a bundle is a single supply or several, with indicators such as a single price and components that are not available separately. Ask the provider how each charge on the invoice is classified, and at what rate, before signing.

Export income and VAT

A business that exports surplus electricity is selling it. HMRC's manual on the old Feed-in Tariff scheme says the generation tariff is not consideration for any supply and is outside the scope of VAT, while export payments are consideration for supplies of electricity to the electricity company where they are made by taxable persons in the course of their business. HMRC says it is generally content that producing electricity to sell back to the grid can be a business activity, and that where it is, VAT is due on the electricity supplied and any associated input tax is deductible under the normal rules.

That manual was written for Feed-in Tariffs. This guide found no HMRC guidance written specifically for the Smart Export Guarantee, so a VAT-registered business receiving export payments should ask its accountant, and its export supplier, how VAT is treated on them. HMRC's reverse charge notice adds two relevant points. The wholesale reverse charge does not apply to supplies made by an accredited feed in installation, and electricity sold under a power purchase agreement or similar agreement is not treated as wholesale where all of the following apply: the seller is a generator exempted from holding a generating licence, the generation capacity by asset is 100 megawatts or less, and the generated volume is not allocated to the generator's production account with Elexon.

The Capital Goods Scheme after 29 July 2026

The Capital Goods Scheme makes a business adjust the VAT it first reclaimed on certain large assets if its taxable use of them changes over the following years. HMRC's Revenue and Customs Brief 7 (2026) changed the scheme from 29 July 2026: computers and computer equipment are no longer covered, and the threshold for land, buildings and civil engineering works rose from £250,000 to £600,000, excluding VAT. A capital item already in the scheme under the old threshold stays in it until the end of its adjustment period. The new threshold applies to buildings and civil engineering works acquired, constructed, refurbished, fitted out, altered or extended on or after that date. Some HMRC guidance, including the Flat Rate Scheme notice, still shows £250,000, so check the date of anything you read.

Whether a solar installation forms part of a capital item is a question to check rather than assume. Notice 706/2 brings in alterations, extensions and annexes to buildings, and capital expenditure on goods and services in the course of refurbishing or fitting out a building that has been capitalised for accounting purposes. When valuing that work it counts goods that become part of the fabric of the building, generally items sold with the property that are not portable or easily removed. Solar panels are not named either way, so a business spending £600,000 or more, excluding VAT, on a project that includes a large roof-mounted array should ask its accountant whether the scheme applies. If it does, the usual adjustment period for a building is 10 intervals, and an adjustment is needed only if the extent to which the item is used for taxable supplies rises or falls compared with its initial use. Each adjustment is the total VAT on the item divided by the number of intervals, multiplied by the change in taxable use. HMRC's Business Income Manual notes that these adjustments may result in additional capital allowances or balancing charges, one reason to keep the VAT and the capital allowances on solar panels working together.

An illustrative example

Illustrative figures only, with every input shown. A business pays an installer £50,000 plus VAT for panels on its warehouse roof and buys outright. VAT at 20% is £10,000 (£50,000 × 20%), so the invoice total is £60,000. The project is far below the £600,000 Capital Goods Scheme threshold.

The business	VAT reclaimed	VAT kept as a cost	Net cost of the panels
VAT-registered and fully taxable	£10,000	£0	£50,000
VAT-registered, partly exempt, 70% recovery	£7,000	£3,000	£53,000
Not VAT-registered	£0	£10,000	£60,000

The 70% in the middle row is an assumption. A business with taxable supplies of £700,000 and exempt supplies of £300,000 in the period has total supplies of £1,000,000, and £700,000 ÷ £1,000,000 × 100 gives a standard-method recovery of 70%, a whole number, so no rounding is needed. Treating the £10,000 as residual input tax, the business recovers £7,000 and £3,000 is attributable to exempt supplies. Whether the de minimis rule lets it recover that £3,000 as well depends on its total exempt input tax for the period and for the year, so the table treats it as a cost. Under hire purchase the same £10,000 would be accounted for at the start of the agreement; under a lease the VAT would come with each rental instead. Model a real quote in the finance calculator.

Common mistakes

• Buying materials only. Panels supplied without installation are standard-rated, even for a house, because the relief is for installation.
• Treating home working as the test. The relief turns on whether the panels are installed in residential accommodation, not on where anyone works. Panels on a house are installed in a dwelling, and HMRC's construction notice says a dwelling that contains a home office needs no apportionment. A separate workshop, yard building or commercial unit at the same address is not residential accommodation in its own right, so ask the installer to explain the rate before assuming 0%. Where something is used partly privately and partly for the business, only the business proportion of any VAT is reclaimable: HMRC's own example is a home office taking 20% of the floor space, which allows 20% of the VAT on utility bills.
• Charging one rate across a mixed-use building. Where a building is partly residential, HMRC's construction notice calls for a fair and reasonable apportionment and names roofs as work affecting both parts. The mixed-use building guide shows a worked split.
• Not checking the installer's invoice. A VAT invoice must show the supplier's VAT number and display the VAT separately, and a zero-rated invoice still accounts for VAT at 0%. Check the rate against the building before paying. If a supplier charges VAT wrongly, HMRC says that is a commercial matter and the customer should seek a refund from the supplier.
• Using an out-of-date threshold. For buildings acquired, built, refurbished, fitted out, altered or extended on or after 29 July 2026, the Capital Goods Scheme threshold is £600,000 excluding VAT, not £250,000.
• Counting the temporary electricity zero rate as a business saving. It applies only to qualifying supplies.
• Forgetting export income. A VAT-registered business should settle how VAT applies to its export payments before the first statement arrives.

Where VAT fits in the wider tax picture

VAT is only one part of the tax position on business solar. Relief for the capital cost works through capital allowances, set out on the solar panel tax relief page and in the Annual Investment Allowance guide, and business rates follow their own rules, covered on the business rates exemption page. When comparing quotes, compare like with like: the ex-VAT price for a business that can reclaim, the VAT-inclusive price for one that cannot, and the timing of the VAT under each route on finance options compared.

This page is general information, not tax advice. VAT depends on the facts of each building, contract and business, so check your own position with an accountant or HMRC before you rely on it. When you are ready to price a system, request a quote and ask the installer to confirm the VAT treatment in writing.