What you do – and don’t – pay VAT on
- What items have VAT added?
- What items have reduced-rate VAT?
- What items are VAT-free?
- The rules surrounding VAT and food
What you pay VAT on
VAT is a tax on consumer spending, which is automatically added to the goods you buy in shops and the services you purchase. The tax is charged on a huge range of items – from clothes, gadgets and big-ticket electrical items to meals in restaurants.
The vast majority of the things you pay for will be subject to VAT at the standard rate. This is currently 20%.
However, the rules around VAT are devilishly difficult to understand. Not all purchases or transactions are subject to VAT, while others have VAT applied to them at a reduced rate.
Find out more: Self-employed: tax-allowable expenses - what can you deduct from your tax bill
In the past, VAT has been seen as a tax on ‘luxuries’ – yet many of the items subject to the tax are viewed by most of us as essentials.
For example, women’s sanitary products and maternity pads, as well as domestic gas and electricity, all have VAT charged on them at a reduced rate. This is currently 5%.
Other goods and services that are subject to reduced-rate VAT include:
- Energy-saving materials installed in personal or business premises, such as solar panels
- Mobility aids for the elderly
- Smoking cessation materials, such as nicotine patches and gum
- Heating oil and solid fuel for domestic and residential use
- Children’s car seats.
Find out more: How VAT rates have changed - a history of VAT rates since the tax was introduced in 1973
Meanwhile, other items are zero-rated for VAT or are exempt from the tax. This means consumers don’t have to pay VAT on them.
Items that are zero-rated for VAT include:
- Baby wear, children’s clothing and children’s footwear
- Books, newspapers and magazines
- Printed or copied music
- Caravans (depending on their size)
- Water supplied to homes
- Donated goods sold in charity shops.
Goods and services that are exempt from VAT include:
- Betting and gaming
- Bingo and lotteries
- Physical education and sports activities
- Burial or cremation of dead people, or burial at sea
- Funeral plans written under contract of insurance
- Medical treatment and health care
- Postage stamps (UK and Isle of Man)
- Financial services such as loans and other forms of credit
- Insurance services.
Find out more: Tax rates, allowances and amounts - how much of your income is taxed
VAT on food: Jaffa Cake or Jaffa biscuit?
Finally, it’s worth being aware that the exact definition of a particular item for VAT purposes can affect whether the tax applies to it. This means there are numerous peculiarities in the VAT system, some of which have resulted in fierce debate between businesses and HM Revenue & Customs.
A famous example is the ‘Jaffa Cakes case’, which went all the way to a tribunal. This case hinged on the disparity between the treatment of cakes and luxury biscuits under VAT rules; while cakes are exempt from the tax, luxury biscuits are subject to VAT at the standard rate.
HMRC argued that Jaffa Cakes were chocolate-covered biscuits, not cakes. Their size and shape, and the fact that consumers often ate Jaffa Cakes in place of biscuits, were used to justify the imposition of VAT on the product.
However, McVities, the makers of Jaffa Cakes, insisted that they were small cakes – and, according to rumour, even produced a giant Jaffa Cake in court to help illustrate this point.
Ultimately, the tribunal ruled in favour of McVities. A similar judgement was made in favour of Marks & Spencer when they argued that marshmallow teacakes should not be subject to VAT.
However, Procter & Gamble, the manufacturers of Pringles, lost their battle to avoid VAT as their product was – despite being only 50% potato – deemed a potato crisp by the courts.
Here are a few other strange quirks of the VAT rules:
- Cold take-away food is zero-rated for VAT, while hot take-away food is subject to standard-rate VAT
- Nuts in their shells are zero-rated for VAT, while shelled, roasted or salted nuts are subject to VAT at the standard rate
- Potato crisps are subject to standard-rate VAT, but maize and corn-based snacks, such as tortilla chips, are zero-rated
- Frozen foods are zero-rated, yet ice-cream and frozen yoghurt are subject to standard-rate VAT.
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