VAT codes explained

When using bookkeeping software you must carefully select the correct VAT code for each transaction. Below we summarise how to use the VAT codes in each of the major software packages:

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No VAT – These transactions will not appear on your VAT returns. This code should be used on transactions outside the scope of VAT.  Examples are transfers between bank accounts, tax payments to HMRC, drawings/dividends by directors/shareholders.

Exempt – This should only be used where your business makes exempt supplies. Where you make an exempt supply (e.g. selling an insurance policy), you should be invoicing with “Exempt Income” and no VAT should be charged.  Any expenses directly related to the supply of exempt goods/services need to be marked as “Exempt Expenses” and no VAT claimed, even if there was VAT on the expense. Examples include Bank charges, postage stamps, insurance and DVLA road tax.

Zero Rated Expenses – This is used where the supply of goods is Zero rated, such as children’s clothes, basic foods, books and newspapers. If your supply is Zero rated, use “Zero Rated Income”. If an expense was Zero rated or the supplier was not registered for VAT, use “Zero Rated Expense”.

20% & 5% – These are the Standard and Reduced VAT rates that are used in the UK. Most supplies fall under the Standard 20% category but the Reduced VAT rate of 5% is used for the supply of energy in some circumstances (and for certain food sales and for certain construction projects).  If making a VAT-able supply, use “20%/5% (VAT on Income)”.  If you have been charged VAT on expenditure and it is not directly related to an Exempt supply, use “20%/5% (VAT on Expenses)”.

Reverse Charge Expenses (20%) – Some suppliers of services are based outside the UK.  For many of these services, the suppliers don’t register for VAT in the UK and so don’t charge VAT.  Instead, you as the customer have to apply the reverse charge rules.  Receipts or invoices received may have a note on them along the lines of “This supply has been made under the reverse charge scheme”.  But either way, please use “Reverse Charge Expenses (20%)”.

Domestic Reverse charge – If the domestic reverse charge applies to your business (i.e. you are in the construction industry), you should use the ‘Domestic Reverse Charge @ 20% (or 5% if relevant) VAT on income)’ code for sales invoices raised. If you incur expenses covered by the domestic reverse charge then you should use the ‘Domestic Reverse Charge @ 20% (or 5% if relevant) VAT on Expenses’ code.

Reduced rate of VAT 12.5% – Relevant for hospitality, holiday accommodation and attractions from 1st October 2021 – 31st March 2022 you will need to set up a new default VAT rate within Xero. Select Accounting, then Advanced. Select tax rates, click new tax rate. Enter the display name and select a tax type (sales or purchases). Add the tax component name and enter the VAT percentage and click save. From 1st April 2022 this returns to the standard rate of 20%.

Import/export of goods – If you are a company for which this applies please seek our bespoke advice. But, generally speaking:

  • For purchase of goods from inside and outside the EU use Zero Rated Expenses (to ensure the net purchase value reaches box 7 of your VAT Return)

  • If UK Customs charges you VAT before releasing the goods then they'll do so by issuing a Certificate C79. Use that certificate to reclaim the VAT and use Xero VAT code VAT on Imports.

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QuickBooks VAT rates are very customisable so you may not have all of these available – or you may have extra ones. This covers the basic rules for each VAT code.

No VAT (0%) – These transactions will not appear on your VAT returns. These should be used on transactions outside the scope of VAT. Examples are transfers between bank accounts, tax payments to HMRC, drawings/dividends by directors/shareholders.

Exempt (0%) – This should only be used where your business makes exempt supplies. Where you make an exempt supply (e.g. selling an insurance policy), you should be invoicing with “Exempt Income” and no VAT should be charged.  Any expenses directly related to the supply of exempt goods/services need to be marked as “Exempt Expenses” and no VAT claimed, even if there was VAT on the expense. Examples include Bank charges, postage stamps, insurance and DVLA road tax.

0.0% Z (0%) – This is used where the supply of goods is Zero rated, such as children’s clothes, basic foods, books and newspapers.  Use this code for both Zero rated sales and Zero rated expenses  – and if the supplier is not VAT registered.

20.0% S (20%) & 5.0% R (5%) – These are the Standard and Reduced VAT rates that are used in the UK. Most supplies fall under the Standard 20% category but the Reduced VAT rate of 5% is used for the supply of energy, in some circumstances (and for certain food sales).  If making a VAT-able supply or incurring an expense with a VAT element, use the appropriate rate.

20.0% RC (0%) – This is to be used for reverse charge expenses. An explanation of the reverse charge rules can be found in the Xero section above.

 

Reduced rate of VAT 12.5% – Relevant for hospitality, holiday accommodation and attractions from 1st October 2021 – 31st March 2022, you can activate this code within Quickbooks. From 1st April 2022 this returns to the standard rate of 20%.

 

Domestic Reverse charge (construction industry) – Select Taxes > Edit VAT > Edit Rates > Select the small cog > Tick ‘include inactive’ and slide on the 20% RC CIS and 5% RC CIS codes

 

Extra codes – If you have any extra codes you would like to discuss or you need any extra information about VAT in QuickBooks, please contact us and a member of our team will be able to help you.

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We love Pandle for small businesses but we suggest upgrading to Xero if your business is VAT registered. However, Pandle can handle very small VAT registered businesses and uses the following VAT codes.

NV | Non VATable - (0%) – These transactions will not appear on your VAT returns. These should be used on transactions outside the scope of VAT. Examples are transfers between bank accounts, tax payments to HMRC, drawings/dividends by directors/shareholders.

EX | VAT Exempt or Zero-Rated (0%) – This should only be used where your business makes exempt supplies or sells Zero Rated goods. Where you make an exempt supply (e.g. selling an insurance policy), you should be invoicing with “Exempt Income” and no VAT should be charged.  Any expenses directly related to the supply of exempt goods/services need to be marked as “Exempt Expenses” and no VAT claimed, even if there was VAT on the expense. Examples include Bank charges, postage stamps, insurance and DVLA road tax.

Zero rated goods include items, such as children’s clothes, basic foods, books and newspapers.  Use this code for both Zero rated sales and Zero rated expenses  – and if the supplier is not VAT registered.

RR | Reduced-Rate - 5.0% – Reduced VAT rate of 5% is used for the supply of energy, in some circumstances (and for certain food sales).  If making a VAT-able supply or incurring an expense with a VAT element, use the appropriate rate.

ST | Standard VAT - 20.0% – The Standard rate used in the UK. Most supplies fall under the Standard 20% category.  If making a VAT-able supply, use “ST | Standard VAT - 20%".  If you have been charged VAT on expenditure that is not Exempt or Reduced Rate it is likely to be at 20% Standard rate VAT.