VAT on Commercial Solar Panels: 20%, Recovery and the Zero Rate

In detail: what VAT Notice 708/6 does and does not cover

Group 23 of Schedule 8 to the VAT Act 1994 zero-rates the installation of energy-saving materials — a list that includes solar panels and, from 1 February 2024, batteries for storing electricity — but only when installed in residential accommodation or, from the same date, in a building intended for use solely for a relevant charitable purpose. HMRC's VAT Notice 708/6 (updated 31 January 2024) explains the relief and confirms the zero rate applies to installations made between 1 May 2023 and 31 March 2027; before May 2023 the relief was the reduced rate of 5% subject to a social-policy condition or a 60% materials-to-labour test, and the reduced rate is what the relief reverts to from 1 April 2027.

A factory, warehouse, office, farm building, hotel or shop is none of those things. Solar installed at business premises is a standard-rated supply at 20%, whether the supplier is an installer, a lessor charging rentals or a PPA developer charging per kilowatt-hour. The VAT is real money on the invoice, but for a fully taxable business it is recovered on the next return, so the true cost is the cash-flow gap between paying it and getting it back.

Who pays what: VAT on solar by building and customer type

Cash flow: when you pay the VAT and when it comes back

• Capital purchase or green loan: 20% on the installer's invoice at commissioning, recovered on the VAT return for that period — a one-to-four-month gap on the full amount. On a £240,000 array that is £48,000 out and back.
• Hire purchase and asset finance: most agreements require the VAT on the asset to be paid upfront with the deposit, then recovered on the next return; the finance covers the net figure.
• Finance lease and operating lease: VAT is charged on each rental, not on the asset, so the cash-flow gap is small and continuous rather than large and once.
• Power purchase agreement: VAT on each electricity invoice at 20%, recovered like any other energy bill.
• Lenders' view: some green-loan and hire-purchase lenders offer a VAT deferral or a short VAT loan bridging the recovery period; ask before assuming you must fund it.

How the routes compare after tax, allowances and VAT is exactly what a written finance comparison sets out — see how to finance commercial solar panels for the sequence and commercial solar finance companies for who offers what.

The zero rate: what changes on 1 April 2027

The zero rate for residential and charitable installations is time-limited. Notice 708/6 states the relief applies at the zero rate from 1 May 2023 to 31 March 2027; from 1 April 2027 the reduced rate returns unless the law is changed again. For a charity planning solar on a building used solely for charitable purposes, commissioning before that date is worth 20 percentage points of VAT on the whole installation. For a business the date changes nothing — the standard rate applies before and after.

Charities also need the “solely” test to hold: a village hall let for private events, or a church building with a commercial nursery, may be a mixed-use building for VAT purposes. HMRC's notice sets out the apportionment; our churches and charities guide covers the funding routes that follow.

Export income, SEG payments and VAT

Export payments under the Smart Export Guarantee or an export contract are business income for a business, and for a VAT-registered business they are consideration for a supply of electricity to the licensee. Confirm the treatment with your adviser before you price export into the model, because the comparison articles that quote SEG rates are written for households and do not mention it. The rates themselves are on our commercial SEG rates page.

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