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VAT – we've all heard of it and most of us know it stands for Value Added Tax. But did you know how much is applied to common household items – and the products that are exempt?
Here, we explore the story behind VAT and take a look at some of the surprising products on which it is – and isn't – applied.
Broadly speaking, VAT is a consumption tax that is applied to commercial activities involving the production and distribution of goods, and the provision of services. It is called a consumption tax as it is paid for by the final consumer, rather than being a charge on businesses.
It has been levied by the UK government since 1973, but is used in all EU countries. Under European law that standard rate must be at least 15% and the reduced rate at least 5%. In the UK the standard rate is 20% (this rate was applied in 2011, rising from the previous 17.5%).
The VAT system is known for being complex and having some strange oddities and quirks in respect to the items it is applied to.
On the whole, HMRC says VAT is applied to luxuries but the government's idea of what constitutes an extravagance can be one of the main sources of its confusion. If you're in the market for a new helicopter or caravan you won't pay VAT but you will if you need a child's car seat, although you will get the reduced rate of 5%.
Similarly, tampon and sanitary products are classed as non-essential items and so VAT is applied. This particular application of VAT has long been argued over by women's campaigners, sparking protests and petitions.
You'll also find a lot of discrepancy in the supermarket aisles. Baked goods such as bread, biscuits and cake are considered essential so don't attract VAT.
But biscuits that are covered, or partly covered, in chocolate attract the standard rate as they are classed as confectionery and in turn, a luxury - food for thought next time you're pondering over cookies or Cadbury Fingers.
There's similar disparity between potato crisps (subject to 20%) and maize and corn based snacks – which you'll find in the same aisle – that are zero-rated.
The government makes a concession for those hoping to make a bob or two by having a flutter, as betting, bingo and lotteries are also VAT exempt.
Other items that attract a zero rating are books, magazines, newspapers, medical treatment, postage stamps and burial or cremation costs.
Some services are also tax exempt including education and training, subscriptions to member organisations, fundraising events by charities and the selling, leasing and letting of commercial land and buildings.
As experts in all areas of tax, from PAYE to VAT and National Insurance contributions, the AMR team is on hand and can help you navigate what can be a confusing subject.
We pride ourselves on our personal, friendly service and provide all the support you need to keep your business running smoothly and efficiently. We can also support you with budgets and cashflow, managing accounts and credit control.
To find out more about how we can help your business, fill in our contact form and one of the team will get back to you.