Our use of cookies VAT on business water bills
Most businesses in the UK receive regular water bills without any VAT charges. However, there are certain customer types where VAT is added to the water bill.
In this article, our water experts explain the VAT rules applied to business water rates in the UK. We outline when VAT should and shouldn’t be charged on water bills and offer guidance on what steps to take if you believe VAT is being incorrectly applied to your bills.
What is VAT for businesses?
VAT stands for value-added tax, a consumption tax placed on most products and services sold in the UK.
However, some items are “zero-rated” for VAT, meaning no VAT is charged. Examples include essential food and drink, books, children’s clothing, and most water services.
Most businesses are VAT-registered and collect VAT from customers on behalf of HMRC while recovering any VAT they have incurred on purchases.
VAT on different elements of business water bills
The following shows the VAT treatment of different elements of a business water bill:
- Water volumetric and standing charges: Charged at 20% for industrial water users, no VAT for all other users.
- Wastewater volumetric and standing charges: 0% for all users.
- Surface drainage charges: 0% for all users.
- Highway drainage charges: 0% for all users.
- Trade effluent charges: – 0% for all users.
- Smart water meter charges: – 20% for all users.
- Water connection/disconnection charges: – 20% for all users.
VAT on water supply charges
Most businesses do not pay VAT on the charges for a mains water supply.
The exception is industrial water customers who typically use a water supply as a direct input to their production and must pay VAT on the water element of their bill.
Examples of industrial water users include gas power stations, which use water to spin turbines to generate electricity, or textile production, where dyeing cloth requires vast amounts of water.
VAT for industrial water users
Industrial water customers pay VAT at 20% on top of business water rates.
The VAT rules define industrial water customers as those in divisions 1-5 of the 1980 SIC business classification.
Since then, the SIC classifications have been updated. The table below shows the current equivalent SIC classifications that are considered industrial water customers:
| SIC Code Grouping | SIC Description | Main types of businesses |
|---|---|---|
| Section B | Mining and Quarrying | Extraction of natural gas and petroleum, all types of mining, and quarrying. |
| Section C | Manufacturing | Manufacturing and processing of food, drink, textiles, and other goods. |
| Section D | Electricity, gas, steam and air conditioning supply | Distribution of electricity and natural gas, generation of electricity including gas power plants. |
| Section F | Construction | Construction of buildings, transport infrastructure and public utilities like telecomes and water. |
Source: HMRC manual – VAT water and sewerage services
The classification of a business is based on the customer’s entire business activities, not the way water is used at individual business water connections.
Which SIC code applies to my business?
SIC codes are a system for classifying all types of companies with a five-digit code. It is a system that government agencies and the HMRC use to classify business activities.
There are 600 individual SIC classifications to choose from when deciding which code applies to your business.
Companies House has produced a searchable directory of SIC codes, which helps you find the code that fits best.
Companies House displays the registered SIC code of each UK limited company on their public register.
What to do if you are incorrectly paying VAT on business water bills
If you think your water supplier has incorrectly charged VAT on your business water bill, we recommend contacting customer services at your business water supplier.
Typically, your supplier will provide a SIC form where you can self-certify the relevant SIC code for your business. The billing team at your supplier will review your submission and make a decision on the VAT treatment of your water bills.
When using our business water comparison service to switch to a new water supplier, you will need to provide the SIC code of your company when agreeing to a new water tariff.
VAT on business water FAQs
Our business water experts answer those common questions regarding VAT charges on business water bills.
Are business water rates VAT exempt or zero-rated?
Business water rates are considered ‘zero-rated supply’ for most businesses, which means that no VAT is charged on the water supply, but it still remains taxable in other ways.
To clarify, VAT exempt is when a service or good is exempt from all taxation.
Business water rates can be treated as a ‘standard-rated supply’ for businesses in the industrial sector.
Is there VAT on Welsh water bills?
The same rules apply in Wales as in the rest of the UK when it comes to VAT. Most businesses are not eligible for VAT unless they are in the industrial sector.
Please refer to our full guide on VAT for water bills above for more information.
Is there VAT on household water bills?
No, in the case of water supplies to homes, no VAT will be added to the bill.
The water industry for households works differently from the business water market. Homes receive bills without VAT for the water they use from their local water company.
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