VAT and renewables: Key issues for the energy sector in 2026

By Scott Berry, VAT and Indirect Tax Manager 

The UK renewable and energy sector continues to experience significant growth, driven by net-zero commitments, energy security concerns and continued investment in low-carbon technologies. Alongside these developments, VAT remains an important factor influencing project economics, consumer behaviour and the pace of the energy transition.

Temporary zero-rate for domestic electricity

One of the most significant recent VAT announcements for the energy sector is the government's decision to introduce a temporary reduction of the VAT rate on domestic electricity from 5% to 0% from 1 October 2026 until 31 March 2027. The measure is intended to provide support to households (and certain charities) facing rising energy costs and is expected to reduce annual electricity bills for a typical household.

From a renewables perspective, this change is particularly noteworthy because it further strengthens the case for electrification. As more households adopt technologies such as heat pumps, battery storage systems and electric vehicles, a reduction in the VAT burden on electricity consumption helps support the transition away from fossil fuels and aligns with broader decarbonisation objectives.

The measure also creates an interesting distinction within the domestic energy market. While electricity will benefit from a temporary zero-rate, domestic gas remains subject to the reduced rate of 5% VAT, potentially increasing the relative attractiveness of electric heating and other low-carbon technologies.

Continued zero-rating of energy-saving materials

Alongside the new relief for electricity supplies, one of the most important existing VAT measures affecting the renewables sector remains the temporary zero rate for the installation of qualifying energy-saving materials (ESMs). Installations of solar panels, heat pumps, insulation, wind turbines and certain other qualifying technologies in residential accommodation and charity properties used solely for relevant charitable purpose, currently benefit from a 0% VAT rate until 31 March 2027, after which the relief is scheduled to revert to 5%.

The relief has proven particularly valuable in reducing upfront installation costs for homeowners/charities and has been widely welcomed across the renewable energy industry. As the sector continues to grow, many businesses and industry bodies will be seeking clarity on whether the government intends to extend the relief beyond its current expiry date.

Battery storage: An expanding VAT relief

A significant enhancement to the ESM regime came into effect on 1 February 2024, when the scope of the relief was expanded to include certain electrical battery storage systems. Importantly, standalone batteries can now qualify for zero-rating even where they are not installed alongside solar panels. This reflects the increasingly important role batteries play in storing renewable electricity, improving energy resilience and supporting grid flexibility.

The inclusion of battery technology demonstrates how VAT policy is evolving alongside developments in the energy market. As storage becomes a critical component of the UK energy system, the VAT treatment helps reduce barriers to adoption and encourages greater integration of renewable generation technologies.

VAT challenges for commercial renewable projects

Despite these favourable developments in the domestic market, VAT complexity remains a key issue for businesses operating in the renewable energy sector. The domestic ESM relief does not generally extend to commercial installations, meaning that many large-scale solar, battery and renewable energy projects continue to be subject to the 20% standard rate of VAT.

As a result, careful consideration of contract structures, partial exemption implications, land arrangements and input tax recovery remains essential. This is particularly relevant where projects involve mixed-use developments, community energy schemes or collaborations between public and private sector organisations.

VAT opportunities and risks in the energy transition

The pace of change within the renewables and energy sector shows no signs of slowing. Recent VAT developments, including the temporary zero-rating of domestic electricity and the continued zero-rating of energy-saving materials and battery storage installations, demonstrate how VAT policy is increasingly being used to support both the UK's net-zero ambitions and wider affordability objectives.

However, with new reliefs come new complexities. Whilst many businesses are focused on the commercial and operational aspects of renewable energy projects, VAT can have a significant impact on project viability, cash flow and overall returns. Incorrect VAT treatment can result in unexpected costs, HMRC assessments and difficulties recovering input tax.

For businesses operating within the sector, now is an ideal time to review existing arrangements and consider whether there are VAT opportunities or risks that need to be addressed.

For organisations investing in renewable technologies, developing energy projects or reviewing their energy strategy, now is an ideal time to assess the VAT implications. Early engagement with a VAT specialist can often identify opportunities for savings, improve cash flow and help avoid costly disputes further down the line. In a rapidly changing sector, obtaining advice at the planning stage can be as valuable as the tax reliefs themselves.