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Installing commercial solar panels is a significant investment for businesses of all sizes, and it’s essential to understand all the financial consequences of generating your own electricity.
This guide explains everything you need to know about VAT on commercial solar panels, including the initial upfront costs, financing and income they can generate.
Summary
Here’s a summary table of all VAT charges related to commercial solar panels:
| Stage | Type | VAT charged? | VAT Rate |
|---|---|---|---|
| Purchase & Installation | Typical | Yes | 20% |
| Financing | Hire purchase Solar leasing PPA Grants | Yes - Upfront Yes - Overtime Yes - Overtime No | 20% 20% 20% 0% |
| Grid Export Income | VAT-reg. Non VAT-reg. | Yes No | 20% 0% |
VAT rules on solar panels for business
VAT is applicable to multiple steps of the solar panel journey for businesses. We’ve split this guide into VAT implications for each step of the journey:
VAT on commercial solar purchase and installation
Most businesses purchase solar panels and other equipment from a professional installer. The initial installation costs will include labour associated with the installation and the purchase price of panels, inverters and PV solar batteries (if applicable!).
The government has recently introduced a VAT exemption for the installation of energy-saving equipment to incentivise solar installation. Unfortunately, the government has clarified that businesses and charities are not eligible for this relief.
This means the bills paid for installing solar energy panels onto non-residential buildings will include VAT at the standard rate of 20%.
VAT on commercial solar panel financing
Investing in a commercial solar panel installation is expensive, and many businesses opt to finance the project. There are several ways to finance a commercial solar project, and each has a slightly different VAT implication:
- Hire purchase financing – Under a hire purchase financing agreement, you’ll pay upfront for the VAT and a small deposit associated with the installation. The remainder of the purchase price is paid in instalments over an agreed number of years.
- Solar leasing – Under a solar leasing agreement, your business will not pay for any of the upfront installation costs. Instead, your company pays a monthly commercial solar leasing charge, including VAT, at 20%.
- Corporate Purchase Power Agreements – In a PPA arrangement, a third-party investor will pay to install solar panels on your property and then sell you the electricity they generate at an agreed price. These business electricity bills will include VAT at the standard rate of 20%.
- Government grants – In certain areas, your business can use government grants to reduce the upfront costs of purchasing and installing commercial solar panels. Business energy grants do not attract any VAT.
VAT on commercial solar panel income
Businesses generating excess electricity can sell electricity back to the local electricity distribution network through the Smart Export Guarantee (SEG).
Under the smart export guarantee, a business electricity supplier will purchase exported electricity at an agreed price per kWh.
The VAT treatment under the smart export guarantee depends on the VAT status of your business. If you’re VAT registered, VAT will be added to your export receipts. If your business is not VAT-registered, the payments you receive under the scheme will not have any VAT.
Bonus: VAT on green electricity tariffs
Many businesses going green will opt for a simple renewable business energy tariff instead of investing in their own commercial solar panels.
With a green business electricity tariff, a business energy supplier will provide electricity generated from renewable sources. In this tariff, the business electricity prices charged on invoices will include VAT at the standard rate of 20%.
One exception exists for small business energy prices, where VAT is charged at the reduced rate of 5%. For a full explanation, check out our guide to VAT on business energy.
Author of this piece
This guide was researched and written by AquaSwitch Director Ben Brading. Ben is a registered chartered accountant with the ICAEW.
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