VAT on commercial solar explained

A lot of online content states, flatly, that businesses now get 0% VAT on solar panels. That is not right, and it is worth being direct about it, because it leads people to budget from the wrong number and then get a surprise at quotation stage.

The 0% rate is real, and solar panels are genuinely on the list of qualifying energy-saving materials — but the relief is defined by the type of building the materials are installed in, not by the technology. Commercial premises are not the buildings it was written for. The confusion is understandable: the same relief, the same notice and the same product all apply to homes, so a headline written about domestic solar reads as though it applies to everyone.

This guide is general information, not tax advice. PPA Funding is an independent introducer, not a tax adviser. VAT treatment depends on your VAT status, what your business does and how the deal is structured, so confirm your own position with your accountant or against HMRC guidance directly.

The standard rate of VAT is 20%, and GOV.UK describes it as applying to most goods and services. A solar installation on ordinary commercial premises falls there, so expect 20% on the installed cost unless your specific circumstances take you outside that.

When you compare proposals, check whether each figure is quoted inclusive or exclusive of VAT. This sounds obvious, but it is the single most common way businesses mislead themselves when comparing a purchase against a funded route, because a 20% difference is large enough to reverse a conclusion.

The relief sits in VAT Notice 708/6. A zero rate applies to the installation of certain specified energy-saving materials from 1 May 2023 to 31 March 2027. Solar panels are within the specified materials, and the notice defines them broadly enough to cover both solar thermal collectors with their associated pipework and equipment, and photovoltaic panels with cabling, control panel and AC/DC inverter.

The scope is the limiting factor. The relief applies to residential accommodation and to charitable buildings, and from 1 February 2024 it was extended to include buildings intended for use solely for a relevant charitable purpose. Ordinary commercial premises — a warehouse, a factory, an office, a farm building used for a trade — are not within that scope.

The notice also names cases where the standard rate applies even though the building might feel residential or institutional: it states that the standard rate applies to the installation of energy-saving materials in hospitals, prisons or similar institutions, and hotels or inns or similar establishments. If you operate in one of those sectors and have seen the 0% figure quoted, that line is the one to read.

The zero rate runs from 1 May 2023 to 31 March 2027. From 1 April 2027 onwards, qualifying installations revert to the reduced rate of VAT of 5%.

This matters mainly for charities and for landlords of residential accommodation who are weighing up timing. For a business installing on commercial premises it changes nothing, because neither the 0% nor the 5% rate applied in the first place.

For most commercial buyers, the 20% is a cash flow question rather than a cost. A VAT-registered business can normally recover VAT on purchases made for its taxable business activities as input tax through its normal VAT return, subject to the usual rules. If that applies to you, the VAT on a solar installation is money that goes out and comes back, not money that is gone.

The qualifications matter, though, and this is where it pays to ask rather than assume. Businesses that are not VAT-registered cannot recover it. Businesses making exempt supplies, or a mix of taxable and exempt supplies, may find recovery restricted or partial. That is a real cost difference, and it is specific enough to your circumstances that only your accountant can confirm it.

This is why the "businesses get 0% VAT" claim is doubly unhelpful. It is wrong about the rate, and it distracts from the question that actually affects your net cost, which is whether and how much you can recover.

With an outright purchase you buy the system and account for VAT on the capital cost like any other asset purchase, recovering it through your VAT return if the usual conditions are met. With hire purchase or a lease, VAT attaches to the financed amount or the payments, and the timing differs from an outright buy even where the total is similar.

Under a power purchase agreement you are not buying equipment during the term at all — the provider owns the system and you buy the electricity it generates. VAT then applies to what you pay for that electricity, in much the same way it applies to your grid supply, rather than to a capital purchase.

None of this makes one route better than another on VAT grounds alone. It does mean the routes are not directly comparable on a single headline number, so raise VAT early when you request proposals and make sure everything you are comparing is on the same basis.