A plain reference · water and sewerage

Water has no VAT on it unless you make things. Then all of it does, offices included.

A classification written in 1980 still decides your water bill. There is no apportionment, the test ignores how you actually use the water, and plenty of businesses are on the wrong rate.

Water is zero-rated — Schedule 8, Group 2. The exception is an industrial customer, charged at 20%. Industrial means your predominant activity sits in Divisions 1 to 5 of the 1980 Standard Industrial Classification. The test looks at all your activities at all locations, not how the water is used — so a factory's office water is standard-rated too. And there is no apportionment: predominance decides the whole supply.
Send me your water bill and what your business does. I will tell you whether the rate is right. Non-industrial businesses billed at 20% are commoner than you would think, and if you are partly exempt that VAT is money gone rather than money reclaimed. Free, back to you within one working day, and nothing follows unless you ask for it. Send me the bill.

A 1980 classification, still in force

HMRC's manual at VWASS2200 defines a relevant industrial activity as any activity described in Divisions 1 to 5 of the 1980 edition of the Standard Industrial Classification. Newer editions were issued in 1992, 2003 and 2007, and HMRC is explicit that the legal basis for decisions remains the 1980 one.

DivisionCovers
1Energy and water supply industries
2Extraction of minerals and ores other than fuels; manufacture of metals, mineral products and chemicals
3Metal goods, engineering and vehicles industries
4Other manufacturing industries
5Construction

Everything outside those five divisions is non-industrial: retail, offices, professional services, healthcare, hospitality, agriculture, transport, education. Those businesses should be receiving water with no VAT on it at all.

Three features that catch people out

The test ignores how you use the water

VWASS2200 says the test looks at all of the customer's business activities at all locations, not how the water is used at the point of supply. So a manufacturer's head office, its showroom and its staff kitchen are all standard-rated, because the company is industrial. A separate meter does not change it.

There is no apportionment

Energy has a 60% rule that treats a mixed supply as qualifying once it crosses the line. Water does not. Predominance decides the whole supply: industrial predominant, all of it standard-rated; non-industrial predominant, all of it zero-rated. The only relief is narrow — water for a separately identified and separately invoiced non-industrial activity can be zero-rated where that activity is not the predominant one and the customer has two or more business activities.

Sewerage follows different rules again

ServiceIndustrial userNon-industrial user
Reception, disposal or treatment of foul water or sewerageZeroZero
Cleaning, maintenance or unblocking of sewers and drains20%20%
Emptying a cesspool or septic tank20%Zero
Reception or treatment of cesspool or septic contentsZeroZero
Other waste removal, treatment and disposal20%20%

So a rural business on a septic tank can quite correctly see the emptying charge at 20% and the treatment of what was emptied at zero, on the same job.

Where the money is

The expensive error runs one way: a non-industrial business billed at 20% on water that should be zero-rated. Nothing in the business flags it, because the VAT simply goes through as recoverable input tax.

Unless the business is partly exempt. Then it is not recoverable, and it is a real cost.

Correcting it goes through the supplier, not your VAT return. You cannot reclaim input tax that was never properly chargeable. Ask the water company to re-rate the account and issue credit notes for the earlier periods. Four years is the usual limit. HMRC accepts a written declaration from a non-industrial customer as the way to confirm the rate, so that is what the supplier will ask for.

Bottled, heated and everything adjacent

References above are to HMRC's VAT Water and Sewerage Services manual and Schedule 8 of the VAT Act 1994. The old Notice 701/16 was withdrawn in 2016, so anything still quoting it is working from guidance HMRC has taken down. This page is a general reference and not advice on a particular business — if your own bill does not match what is set out here, that is exactly the sort of thing worth sending over.