You have to remember this was released way back in 1981 where compared to what was out at the time was quite violent. Not to mention that same year the Movie ratings board started cracking down heavily on violent movies (in particularly the slasher flicks). Of course since you are referring to the "Video Nasty's list" (UK) all I can say is that there are more than a few questionable ones on the list like for example "Unhinged" which has only about two quick moments of what one might slightly consider strong violence and the rest of the film was pure boredom with lots of bad acting.
As for the Nightmares being boring, well expect for the occasional violence, our hero twitching and frothing at the mouth, unintentionally funny dialogue and scenes, and the final showdown with the killer, I have to agree with you. Much of the film seems very padded and it is probably one of the main reason why it will never be considered a real slasher classic.
I have seen many of the so-called "Video Nasties" Many of them were pretty tame as far as I'm concerned and I wonder what all the fuss was about. This one wasn't that bad either. Perhaps the one girl who gets her throat cut and then stabbed a few times would have been considered "extreme" back then but I've seen far worse.
From what I've heard The Funhouse (1981) was likely a case of misunderstanding and got caught in the crossfire. Apparently another more graphic film had a similar title.
It was a little tedious here and there, but I thought it was generally entertaining for this type of flick.
As for confusing, it wasn't confusing to me, although I can see how the artsy style would throw some people off.
In any case, here's the plot in a sentence: The psycho antagonist is deemed well by his handlers at the asylum and so is let loose in New York City whereupon he falls back into his murderous ways and naturally travels to Florida in order to see his son and ex-wife again.
As you can see, the plot's actually pretty simple beneath the artiness. And, interestingly, it matches the basic plot of the seminal "Halloween" -- A homicidal psycho leaves the Sanitarium to prey on his relatives, committing murder along the way; meanwhile his doctor tries to locate him before the body count gets too high.
Concerning the gore, there was more than usual for an 80's slasher, like the opening bed sequence and the closing flashback to the kid axing his mother & father engaging in sadomasochistic sex acts, which was as gory as it gets.