What VAT applies to commercial air conditioning?

Why is commercial air conditioning charged at 20%?

Because no relief applies to it by default. GOV.UK says a VAT-registered business usually charges the standard rate, currently 20%, on most goods and services unless they are classed as reduced or zero-rated. A contractor who supplies and installs air conditioning in an office, shop, warehouse or restaurant charges that rate unless a specific relief fits. The only relief this guide found that reaches air conditioning equipment is the energy-saving materials relief in HMRC's VAT Notice 708/6, and that relief is tied to the type of building.

The notice sets a zero rate for installing specified energy-saving materials from 1 May 2023 to 31 March 2027, with the reduced rate of 5% from 1 April 2027. The tests in the notice are:

Test	What Notice 708/6 says
Dates	Zero rate from 1 May 2023 to 31 March 2027; 5% from 1 April 2027
Building	Residential accommodation, and since 1 February 2024 buildings intended for use solely for a relevant charitable purpose
Supplier	The business that installs the materials; selling the materials without installing them is standard-rated
Equipment	Includes air source heat pumps that are permanently fixed; portable or moveable units do not qualify

Does air conditioning count as an air source heat pump?

Often, yes, and that matters less than people expect. The notice says fixed air source heat pumps can be reversed to provide cooling in summer, and that HMRC's understanding is that most air conditioning units are air source heat pumps. It adds that in cases of doubt, whether a particular product is treated as one depends on the facts of each case. So the equipment is not what keeps a commercial installation out of the 0% rate. The building is.

Residential accommodation, as the notice defines it, includes houses, blocks of flats and other dwellings, homes providing care for the elderly, disabled people, or people with drug or alcohol dependency or mental disorder, hospices, residential accommodation for students or pupils, and self-catering holiday accommodation. The notice also states that the standard rate applies in hospitals, prisons or similar institutions, and hotels, inns or similar establishments. Offices, shops, warehouses and restaurants are not residential accommodation, so the 20% rate applies to them.

A permanently fixed split system in a care home or a block of flats can therefore fall inside the relief, while the same unit in a shop does not. For the funding side of the same projects, see the guide to grants for business air conditioning.

How are mixed-use buildings and charities treated?

Mixed use. A flat above a shop is the usual case. The notice does not set a rule for splitting one system that serves both parts. It asks instead whether a job is a single supply, where one element is the principal element and the rest are ancillary, or several supplies. It lists separate pricing or invoicing, and items being available separately, as indicators of more than one supply, and it says that where more than one job is done at the same premises the VAT liability depends on the circumstances. A contract that prices the residential part separately gives an accountant something to test against those indicators. One system serving both parts needs an answer from HMRC or an accountant before the order.

Charities. The test is use of the building solely for a relevant charitable purpose, which the notice defines as use by a charity otherwise than in the course or furtherance of a business, or as a village hall or similar. Being a charity is not enough on its own. The contractor should take reasonable steps to confirm the use and keep documentation, for example a letter from the customer, and the notice says no certificate is required. It points to section 14 of VAT Notice 708 for more on charitable buildings.

Can a VAT-registered business reclaim the 20%?

Usually, yes. GOV.UK says a VAT-registered business can reclaim VAT on items bought for use in its business, through its VAT return, provided it keeps records and holds valid VAT invoices. Two limits matter on an air conditioning project:

• VAT cannot be reclaimed on goods and services a business uses to make VAT-exempt supplies. A business that makes a mixture of taxable and exempt supplies is treated as partly exempt, and only part of the VAT may be recoverable.
• Organisations that are not VAT-registered, such as a local authority, academy or eligible charity, follow different rules from the ones above.

GOV.UK also flags special rules in the Capital Goods Scheme for larger business assets, which spread the VAT claimed over a number of years. Whether a given air conditioning project falls into those rules is a question for the accountant, not something the project's invoice settles.

Why might an installation invoice show no VAT?

The VAT domestic reverse charge can move the VAT accounting from the contractor to the customer. GOV.UK says it must be used for most supplies of building and construction services, and its list of services includes installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure. It applies to customers registered for VAT whose supplies are reported within the Construction Industry Scheme.

The technical guide describes an exception for end users: businesses that are VAT and Construction Industry Scheme registered and do not make onward supplies of the construction services they receive. The reverse charge does not apply to supplies to an end user who tells the supplier in writing that it is one. A private domestic customer is outside it because that customer is not VAT-registered. A business that expects an invoice with no VAT, or one with VAT it believed was reverse-charged, should check its status with an accountant before paying.

When should a business ask an accountant?

• The building is mixed use, or part of it is let to a charity.
• The business makes exempt supplies, or is not VAT-registered.
• The project is large enough to raise Capital Goods Scheme or reverse charge questions.
• The contractor's quote applies a rate other than 20% to commercial premises. The quote should say which relief it relies on and for which part of the building.
• The business wants to claim capital allowances on the same spend. The capital allowances guide explains how the system is classified, and the grants and funding page sets out the other routes.

This page summarises HMRC's published position. It is not tax advice.

Sources

• Energy-saving materials and heating equipment (VAT Notice 708/6), HMRC via GOV.UK, last updated 31 January 2024, checked 22 October 2026
• Charge, reclaim and record VAT, GOV.UK, checked 22 October 2026
• Reclaim VAT on business expenses, GOV.UK, checked 22 October 2026
• VAT domestic reverse charge for building and construction services, HMRC via GOV.UK, checked 22 October 2026
• VAT reverse charge technical guide, HMRC via GOV.UK, checked 22 October 2026

Common questions

Is buying an air conditioning unit without installation zero-rated?

No. The notice says that if energy-saving materials are supplied without being installed, the supply is standard-rated, and that a retailer's sale of such materials is always standard-rated.

Does the 5% rate after 31 March 2027 extend to commercial buildings?

The notice says installations of energy-saving materials revert to the reduced rate of 5% from 1 April 2027. It describes that as a change of rate. It does not describe a change in which buildings are covered.

Can a hotel claim the 0% rate for air conditioning?

No. The notice states that the standard rate applies to the installation of energy-saving materials in hotels, inns or similar establishments, and in hospitals, prisons or similar institutions.

Does a portable air conditioner qualify?

No. The notice says only air source heat pumps that are permanently fixed, and not portable or moveable, qualify as energy-saving materials. In a commercial building the standard rate applies in any case.

Who decides whether a particular unit counts as an air source heat pump?

The notice says that in cases of doubt, the decision depends on the facts of each case. A contractor applying a reduced rate should be able to say on what basis the product and the building qualify.

Related guides

• Is there a grant for air conditioning for businesses?
• Capital allowances on commercial HVAC: what businesses can claim
• 2-pipe or 4-pipe fan coil systems?
• Absorption chillers: when waste heat can drive cooling