Ben Brading 3 min read

Does VAT apply to business solar panels?

The UK government incentivises the installation of solar panels on domestic or charitable properties by making these purchases zero-rated, saving consumers thousands of pounds in VAT.

However, this incentive does not apply to installing solar panels on commercial properties, where the VAT situation is more complex.

In summary, businesses pay VAT at the full rate of 20% on solar hardware, batteries, and installation costs, but most can reclaim this from HMRC.

We begin our guide by explaining the key factor in reclaiming VAT on commercial solar panels: VAT registration.

Businesses and VAT registration

VAT is a consumption tax added at 20% to the value of most goods and services sold in the UK. Most businesses in the UK are VAT-registered and collect VAT on behalf of the government by:

Adding 20% VAT to all goods and services they sell and collecting this from their customers.
Reclaiming the VAT they incur on any purchases.
Making quarterly returns to HMRC, which calculates the VAT owed as VAT collected minus VAT reclaimed.

Businesses with an annual turnover of £90,000 or more must be VAT-registered.

VAT-registered businesses are generally unaffected by the VAT charged on purchases (such as the cost of installing solar panels), as they can reclaim this VAT from HMRC in their quarterly VAT returns.

Non-VAT-registered small businesses cannot reclaim the VAT they pay on purchases, so understanding the VAT treatment of costs is essential.

Current VAT rate for business solar panels

When installed on a commercial property, all elements of commercial solar panel costs should be charged at the standard 20% VAT rate.

The commercial solar panel provider is responsible for applying the correct VAT rate on their sales invoices.

The standard 20% VAT rate applies to:

Hardware purchases – panels, inverters, racking, wiring, etc.
Installation costs – design, labour, and inspection costs.

If your property is used for residential purposes (such as a care home, university accommodation, etc.) or charitable purposes, we recommend confirming upfront with your commercial solar provider that installation costs will be zero-rated for VAT.

Can businesses reclaim VAT on solar panels?

Businesses can reclaim the VAT they have incurred on commercial solar equipment and installations if the following conditions are met:

They are VAT-registered.
The solar provider has issued a valid VAT invoice, which must be retained for VAT inspections.
The business charges VAT at the standard rates on its sales (i.e. it is not engaged in exempt activities, such as financial, insurance, or health services).
The solar panels generate electricity the business consumes (or is sold through a Corporate PPA or an SEG scheme, where VAT is charged).

VAT on solar battery storage for businesses

Since 1 February 2024, solar storage batteries installed in residential accommodations or buildings intended solely for a relevant charitable purpose are zero-rated for VAT.

In contrast, solar batteries and other energy storage devices installed in commercial properties are subject to VAT at the standard 20% rate.

VAT on commercial solar income

Businesses with commercial solar panels can export and sell excess electricity back to the grid through a Power Purchase Agreement or the Smart Export Guarantee scheme.

Revenue from solar exports should have VAT added at the standard rate of 20%.

Find out more in our full explanation of how to set up VAT on Smart Export Guarantee payments.

VAT on commercial solar financing

The upfront costs of a large commercial solar installation can be significant, so many businesses use financing to spread the investment over time.

Here are the VAT implications of different commercial solar financing options:

Hire purchase financing/bank loan – You will need to pay the VAT upfront for the commercial solar purchase but can recover this from HMRC in the next quarterly return (if VAT-registered).
Solar leasing – The solar provider pays the upfront installation costs (including the associated VAT). Instead, you will be charged 20% VAT on your monthly leasing payments.
Corporate PPA – With a Corporate PPA, a separate investor funds the installation of the solar equipment. You will receive monthly invoices for business electricity prices based on the power generated by the panels, which will include VAT at 20% (the same as all VAT on business electricity and gas bills).

How VAT on commercial solar panels affects ROI and the payback period

The VAT on the cost of installing commercial solar panels may impact the return on investment (ROI), depending on the circumstances of your business:

VAT-registered businesses with non-exempt sales (most businesses) – VAT paid on the solar panel installation can be fully recovered from HMRC and will not affect the ROI calculation.
Non-VAT-registered businesses – VAT paid on commercial solar panels cannot be recovered, increasing the total installation cost and reducing the ROI.
VAT-registered businesses with exempt sales – Financial or healthcare companies may not be able to recover all VAT associated with purchasing solar panels, which could reduce the ROI.

VAT on commercial panels FAQs

Our business energy experts answer key questions regarding VAT and commercial solar panel installations.

Can my business get VAT-free solar panels

No, businesses typically cannot get VAT-free solar panels.

HMRC legally requires firms that install solar panels and equipment to charge VAT on installations for non-domestic properties, except in the following cases:

Properties used for charitable purposes.
Properties used for residential purposes (e.g. care homes, student accommodation, etc.).

How do I reclaim VAT on my solar panel purchase?

The VAT incurred on commercial solar panel installation is included in the quarterly VAT return reported to HMRC.

The VAT incurred on commercial solar purchases is typically included in Box 4: VAT reclaimed in the period on purchases and other inputs. This amount is then deducted from the net VAT payable to HMRC.

Does VAT treatment on solar panels differ from green business energy tariffs?

Both green business energy tariffs and purchasing commercial solar equipment involve paying VAT at the standard 20% rate.

With a green business energy tariff, a business energy supplier will use the REGO scheme to certify that the electricity has been generated from renewable sources.

Under this tariff, all elements of business electricity bills are subject to VAT at 20%, in addition to the Climate Change Levy.

At Business Energy Deals, we specialise in helping businesses find cheaper tariffs. Use our business electricity comparison service today to explore the best deals available.