VAT hike - round up of the rules

Subject: VAT hike - round up of the rules Thu Jan 06, 2011 3:19 am

The VAT hike means we'll be paying more for all kinds of things from computers and clothes, to building work and web design.

Yet there are a few surprises where items are VAT-free or charged at a reduced rate. Here's a round up of the confusing value-added tax rules.

VAT is the tax on consumer spending which is automatically added to the goods you buy in shops and the services you purchase.

Reduced-rate VAT
VAT is normally seen as a tax on 'luxury' items. However, many of the items subject to tax are considered to be essentials for most people. For example, domestic gas and electricity and other fuels all have VAT charged on them at a reduced rate of 5%.

Other goods and services subject to reduced-rate VAT include energy-saving materials installed in personal or business premises such as solar panels, mobility aids for the elderly and children's car seats.

VAT-free
There are a number items that are zero-rated or exempt from VAT. Consumers do not have to pay VAT on items including most food, baby wear, children's clothing and footwear, books, newspapers, magazines, water supplied to homes, donated goods sold in charity shops, and caravans - depending on their size.

Good and services that are exempt from VAT include betting and gaming, physical education and sports activities, medical treatment and healthcare, burials and cremations, funeral plans and financial services such as loans and other forms of credit.

VAT confusion
Frank Haskew, head of Tax Faculty at Institute of Chatered Accountants in England and Wales (ICAEW), explains: "It is worth being aware that the exact definition of a particular item can affect whether VAT is applied to it.

"There are a number of irregularities in the VAT system, some of which have resulted in fierce debates between businesses and HMRC."

One famous example is the arguement over Jaffa Cakes which went all the way to a tribunal to determine whether they were classed as cakes or luxury biscuits. While cakes are exempt from tax, luxury biscuits are subject to VAT at the standard rate. McVities, the makers of Jaffa Cakes, insisted they were small cakes and eventually the tribunal ruled in favour of this.

In addition, cold take-away food is zero-rated for VAT, while hot take-away food is subject to standard-rate VAT. Similarly, frozen foods are VAT-free, yet standard-rate VAT is applied to ice cream and frozen yoghurt.

You can find out more about specific VAT rules for different sectors here on the HMRC website.