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Back to Basics : Paying the right amount of VAT. The 5% rate

29th Apr 2015
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Laurence Vogel explains how the reduced VAT rate works.

While most businesses charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions that businesses should be aware of. In this article we will focus on the reduced 5% rate. However, before doing so it is useful to remind ourselves of the different rates of VAT that can be charged depending on the nature of a supply.

In the UK there are three separate VAT rates: standard rate – 20%; reduced rate – 5%; and zero rate – 0%.

In addition, there are two other categories that the supplies of goods and services can fall under:

• Exempt – where no VAT is charged on the supply.

• Supplies that are ‘outside the scope’ of the UK VAT system altogether.

History of 5% VAT rate

While EU legislation and the VAT directive in particular provides the framework for the way that VAT is operated in the EU, each EU member state has some autonomy as to the rates of VAT that can apply. For example, the standard rate must be within the allowed range of 15% to 25%. The EU legislation also allows for the provision of one or two reduced rates of VAT that cannot fall below 5%.

Some EU member states, including the UK, have a zero rate that was agreed as part of their EU Accession Treaty. For example, in the UK most ‘basic’ food stuffs are zero rated. However, the UK is no longer able to add to the zero rate categories, and the minimum VAT rate that can be applied to any new category that the government seeks to reduce rate is 5%.

The list of reduced rate items broadly relates to areas where the government seeks to lower the burden of VAT in areas where they feel there is a social responsibility to do so.

The reduced rate of VAT applies to certain goods and services, including items such as domestic heating fuel and children’s car seats. For each category it is important to be aware of the detailed rules that apply.

In certain cases, the reduced rate only applies if certain conditions are met. For example, the entitlement to use the reduced rate may depend on who is providing the goods or services, who is buying them or where the goods and services are provided.

Electricity, gas, heating oil & solid fuel: The supply of electricity for domestic or for non-business use by a charity is usually supplied at the reduced rate. On supplies used solely for business purposes, VAT will usually be charged at the standard rate. The legal provisions for the reduced rate are in the VAT Act 1994, Section 29A.

Children’s car seats, booster seats and booster cushions: These are subject to the reduced rate of VAT, and there are special rules for systems such as a pram/safety seat combinations. The VAT liability would usually have the safety seat reduced-rated and the pram element standard-rated. The reduced rate is not tied to any specific manufacturing standard.

Smoking cessation products: The introduction of the 5% reduced rate for the sale of ‘over the counter’ smoking cessation products such as nicotine patches and gum came into effect on 1 July 2007 to coincide with the introduction of the English smoking ban. This change did not affect the supply of smoking cessation products that are dispensed on a prescription, which remain zero-rated under VAT Act 1994.

Sanitary protection products: VAT is chargeable at a reduced rate of 5% on eligible sanitary protection products. The reduced rate applies to the supply of any sanitary protection product that is designed and marketed for the absorption or collection of menstrual flow or lochia (discharge from the womb following childbirth). The relief should apply automatically to the purchaser of eligible sanitary protection products.

Mobility aids for the elderly (installation): The reduced rate applies to the installation of mobility aids for elderly people where certain conditions are met. The reduced rate applies where all the following apply:

• The goods are installed and just not supplied. Where the goods are installed, the reduced rate can be charged on the goods and the installation work.

• The goods are installed in a private home, not in a residential care home or similar establishment.

• The person who uses and benefits from the mobility aids is aged 60 or over. It doesn’t matter though who actually orders and pays for the work.

Mobility aids that can be reduced-rated for VAT are: grab rails; ramps; stair lifts; bath lifts; built-in shower seats or showers containing built-in shower seats; and walk-in baths with sealable doors.

Land and property

The 5% rate was introduced as part of the ‘Urban Regeneration Scheme’, which encouraged redevelopment of ‘brownfield’ sites rather than the development of Green Belt land.

Renovation/alteration of an empty residential building: Under this provision, where an existing residential property is renovated that has not been lived in during the two years immediately before the building work commences can be supplied at the 5% rate. The rules allow for illegal occupation by squatters and non-residential use, such as storage for a business to be ignored in calculating the two-year rule.

Converting premises into different living accommodation: The reduced VAT rate can apply where the number of dwellings in the property after a conversion changes from the number of dwellings before the conversion. The number of dwellings can increase or decrease, and includes changes from zero dwellings to one or more. This means the conversion of a non-residential building into residential property (e.g. converting a restaurant into a house, or a warehouse into apartments) is eligible for relief.

Energy saving materials

The supply of certain energy saving materials permanently installed in residential or charity premises are covered by the reduced rate. The reduced rate applies whether or not the installation is grant-funded and includes the price of the goods themselves. The reduced rate applies to installations of: central heating and hot water system controls; draught stripping; insulation; solar panels; wind turbines; water turbines; ground source heat pumps; air source heat pumps; micro combined heat and power units; and wood-fuelled boilers.

The reduced rate also applies to the grant-funded installation of certain heating equipment and certain security goods in the sole or main residence of a qualifying person. This includes the price of the equipment itself. The reduced rate only applies to the extent that the supply is grant-funded.

The supply of energy-saving materials, heating equipment or security goods without installation is standard-rated, even if it is grant-funded.

• Laurence Vogel is Head of UK Operations at Informanagement

This article is taken from “Accounting Practice” the ICPA quarterly magazine. Dedicated to supporting and promoting the needs of the general practitioner. You can find us at www.icpa.org.uk  or email [email protected]  or by phone on 0800-074-2896

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