Step 1: Define Accuracy.
Accuracy is defined as error expressed as a percentage of the true value.
Step 2: Perform Calculation.
Given an accuracy of $0.5%$ of full scale, and a reading of $5%$ of full scale: \[\text{Relative error} = \frac{0.5}{5} \times 100 = 10%\] This indicates an instrument error of $\pm 2.5%$ relative to the measured value.
Step 3: State Conclusion.
The correct option is (D).