Beating the VAT Rise: What is Exempt?

The increase in the headline rate of VAT, from 17.5 to 20 per cent, was amongst the most headline-grabbing elements of the Chancellor’s first Budget announcement. The rise, which came into force on 4 January 2011, was a central element of the coalition government’s efforts to tackle the deficit. But many are unhappy about the plans.

It is estimated that the 2.5 per cent increase added around £33 per year to the average family’s shopping bill. Many believe that those with the least to spend will be the hardest hit; VAT is a regressive tax, meaning that it proportionally costs those with the smallest incomes the most.

But while the rise in VAT might be unavoidable, there are ways to minimise its impact. Not all goods attract VAT at the headline rate. By rethinking your shopping habits you can significantly mitigate the damage.

Supermarket Shop

The strange nature of the VAT schedule is perhaps illustrated best during your regular supermarket shop. Different food items attract VAT at different rates, and there is often apparently little rhyme or reason involved.

So, if you buy salted but unshelled nuts from the supermarket, you will not pay VAT. On the other hand, if the nuts are shelled, VAT will be charged. This perfectly illustrates the potential savings that can be made through very small changes to your shopping habits. As another example, you will pay VAT on potato crisps. But tortilla chips are exempt – so, if they are of a similar price, you can avoid paying the extra 20 per cent.

It is worth having a look round the supermarket to see which items attract VAT. The general rule is that unprocessed food (for example fresh fruit and vegetables) is zero-rated (meaning that you do not pay VAT).

Leisure Activities

Sport and leisure activities are broadly exempt from VAT. Goods or services relating to physical education and sports activities attract no VAT – although the taxman has actually compiled a list of sports and activities for which it will offer exemptions. This list is surprisingly short, so you may wish to check before making a purchase.

Home Improvements

Building and home improvement is another area in which you can make significant potential savings by changing your behaviour in very small ways.

You should consider the different VAT treatment of certain types of construction work and improvement. Generally speaking, alterations to unoccupied buildings receive less favourable treatment than work done on a main home. Indeed, an alteration to an empty residential building will attract VAT – although only at 5 per cent.

It is also worth noting the tax treatment of garages and extensions. If you build a garage, or convert a building into a garage, and it will be used as part of an occupied residential property, it will count as zero-rated. But if you were to convert a garage into a ‘granny annex’ (or construct a new building of this type), it would not be counted as zero-rated – as it could not be disposed of separately from the main house.

The increase in the headline rate of VAT is certainly going to make everyone’s wallets lighter. But with a bit of forethought and a basic understanding of the VAT schedule, you can change your behaviour slightly – but enjoy big savings.