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Is there VAT on business water bills?

Water bills for most businesses comprise charges for water and charges for wastewater. The VAT rules for water and wastewater are not the same. Water charges can be subject to VAT at the standard rate, whereas there is no VAT on wastewater or trade effluent charges.

Whether or not your business is charged VAT on water usage depends on your Standard Industrial Classification (SIC) code.

SIC codes are used by government bodies, such as Companies House and the Office for National Statistics, to systematically identify and categorise the principal business activities of limited companies.

SIC codes reflect the operational activities, and businesses are grouped into trades or sections with similar classifications. Most businesses only need one SIC code, but some may need more than one depending on the complexity of the business. In cases of multiple SIC codes, the code reflecting the business’s predominant activity is used to determine whether VAT is charged.

In essence, most industrial businesses will be subject to VAT on their water bill and those that are non-industrial will not.

Industries that are typically subject to VAT on their water bills include:

  • Chemicals
  • Construction
  • Engineering
  • Manufacturing
  • Mining
  • Textiles
  • Utilities

The SIC codes that are used to determine whether VAT applies on water charges are the ones in the 1980 edition of the SIC codes. You can find out which of those SIC codes applies to your business here . The first digit of that SIC code determines which SIC division the business falls under, and those divisions in turn are categorised into ones which are subject to VAT on water charges and ones which are not.

Industrial divisions

There are 5 divisions of the 1980 SIC code list for which VAT is payable on business water charges. These are:

  • Division 1 – Energy and water supply industries
  • Division 2 – Extraction of minerals and ores other than fuels; manufacture of metals, mineral products, and chemicals
  • Division 3 – Metal goods, engineering, and vehicle industries. Manufacture of metal goods not elsewhere specified
  • Division 4 – Other manufacturing industries
  • Division 5 – Construction

Non-industrial divisions

The other SIC divisions are not subject to VAT on their water bills. These are:

  • Division 0 – Agriculture, forestry, and fishing
  • Division 6 – Distribution, hotels, catering, and repairs
  • Division 7 – Transport and communication
  • Division 8 – Banking, finance, insurance, business services, and leasing
  • Division 9 – Other services (including education and other public services)
  • Division 000 – Diplomatic representation, international organisations, allied.

Which VAT rate applies to my water bills?

  • When a business has a SIC code that falls into one of the Industrial divisions, the standard rate of VAT, currently 20%, is applied to water charges.
  • For non-industrial businesses, there is no VAT on water charges – they zero rated.
  • Regardless of your SIC code, there is no VAT on wastewater or trade effluent charges. They are zero rated.

What if my business is not registered for VAT?

The application of VAT is determined by the SIC code as described above, regardless of whether your business is VAT registered.

Can I reclaim the VAT on my water bills?

HMRC’s normal VAT reclaim rules apply. In practice, this means that most businesses that are VAT registered can reclaim the VAT but there are exceptions such as businesses that make supplies that are exempt from VAT. We cannot advise on this.

How to avoid incorrect VAT charges

To ensure you are paying the correct VAT charges on your business water bills, let your business water retailer know your SIC code. If you do not inform your retailer of your SIC code, whatever your business, they are obliged to charge VAT on your commercial water services by default.

Castle Water customers can log in or register to update a business SIC code in the customer portal here. A downloadable copy of the SIC form is also available.

If you would like to talk to one of our advisors about the VAT on your water bill, webchat is the fastest way to get in touch. Webchat is available on our website and on your online portal.

New to managing your Castle Water account online or never logged in before? Find out more about the customer portal and get logged in here.