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HMRC internal manual

VAT Fuel and Power

HM Revenue & Customs
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Scope of the reduced rate: domestic Use: wholesale supplies of gas for conversion to heat and power in combined heat and power (CHP) systems

CHP systems use a heat engine or a power station to generate simultaneously both electricity and heat. This contrasts with conventional ways of generating electricity where much heat is lost during the process.

We accept that when an energy provider supplies fuel to an institution such as an university which has its own CHP, the institution may issue a certificate to the energy provider in respect of any input gas converted by the CHP to fuel and power which is to be used for a qualifying purpose e.g. student accommodation. This is a different arrangement from cases such as Oval mentioned above, where the energy provider supplied gas to a separate entity from the end-user of the converted fuel.

Although the fuel and power produced by the CHP system is not the same as the gas from which it is converted, the law does not specify whether the qualifying reduced -rate use has to be the first use or not, where more than one use is possible by the recipient of the gas.

However, if the gas or other fuel is supplied by a wholesaler to one member of a VAT group who converts it into electricity and heat in a CHP and then provides them to another member of the same VAT group, then the reduced -rate cannot apply. This is because the supply of the converted energy must be disregarded for VAT purposes as it is between two members of the same VAT group.