Reduced Rate VAT
A 5% VAT rate applied to certain goods and services deemed essential or beneficial, including domestic fuel and power, children's car seats, and some energy-saving materials. The reduced rate is significantly lower than the standard 20% rate to ease the cost burden on consumers in these categories. Businesses must correctly classify their supplies to charge and reclaim VAT at the appropriate rate.
How it works
The reduced rate sits deliberately between the standard 20% rate and the 0% zero rate, applied to a specific list of goods and services that the government considers worth discounting without exempting entirely. Domestic fuel and power — gas, electricity, and heating oil supplied to a home rather than a business — is one of the largest categories, alongside items like children's car seats and qualifying energy-saving materials.
For VAT-registered businesses, correctly classifying a reduced-rate supply matters because charging the wrong rate on an invoice can trigger an HMRC compliance query. Crucially, being reduced-rated still counts as making a taxable supply, so the business can reclaim VAT on its own purchases in the normal way — unlike a business that only makes VAT-exempt supplies.
As with the standard rate, the reduced rate applies uniformly across England, Scotland, Wales, and Northern Ireland — VAT is entirely a UK-wide tax with no Scottish variation, unlike income tax.
Example: reduced rate vs standard rate on the same sale
A supplier sells £200 of domestic heating oil, which qualifies for the reduced rate.
VAT at 5% is £200 × 5% = £10, so the customer pays £210 in total.
If the same £200 sale were standard-rated instead, VAT at 20% would be £40, making the total £240 — a £30 difference purely from the rate applied.
Frequently asked questions
Why do only some goods qualify for the reduced rate?
Parliament sets out a specific list of goods and services in VAT legislation that are judged worth discounting, such as domestic fuel and power, rather than applying a blanket lower rate to everything.
Is reduced-rate VAT different from zero-rate VAT?
Yes, reduced-rate supplies still charge the customer 5% VAT, while zero-rated supplies charge 0%; both count as taxable supplies that let the business reclaim VAT on its own purchases, unlike exempt supplies.
Do I need a separate VAT registration to sell reduced-rate goods?
No, the same registration and threshold rules apply; once registered, you simply charge whichever rate — standard, reduced, or zero — is correct for each good or service you supply.
Related Terms
Value Added Tax
A consumption tax charged at each stage of production and distribution on goods and services, with the final burden falling on the end consumer.
Standard Rate VAT
The main VAT rate of 20% applied to most goods and services sold in the UK by VAT-registered businesses.
Zero Rate VAT
A 0% VAT rate applied to certain essential goods and services, including most food, children's clothing, books, and prescribed medicines.
VAT Registration Threshold
The level of taxable turnover above which businesses must register for VAT, currently £90,000 per rolling 12-month period.
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