Different accounting software packages treat their VAT codes and rates in different ways. This quick guide should point you in the right direction so that you know which rate to use in which situation:
Xero
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.
Zero Rated – 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 returned to the standard rate of 20%.
Import/export of goods – Other rates in respect of the import and export of goods do not tend to come up too often for most businesses using Xero. If you are a company for which this applies and you would like to discuss these rates, please contact us.
QuickBooks
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. insurance) or incur a cost directly related to an exempt supply, you should be selecting this option, even if there is VAT on the expense.
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 returned 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.
IRIS Kashflow
IRIS Kashflow has a very simplified structure for accounting for VAT where only the rate is provided, and is set up with a large variety of rates which probably do not apply to you.
N/A – 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.
0% – This should be used for both Zero rated and Exempt supplies and expenses. Examples of each of these have been provided above. Also, if a suppler is not VAT registered and the supply would otherwise be subject to VAT, please use this rate.
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).
Domestic Reverse Charge (construction industry) – For sales: Select Customers > Select appropriate customer from the list > CIS and Other Info. Tick the option Apply CIS to Sales Invoices (if it has not already been ticked). You will then see the option Apply Reverse Charge VAT. Tick this option to include VAT reverse charge on sales invoices raised for this customer. For Purchases: Suppliers > Select the appropriate supplier from the list > CIS Settings. Tick the option Apply CIS to receipts. You will then see the option Apply Reverse Charge VAT. Tick this option to include VAT reverse charge on purchases raised for this customer.
Reduced rate of VAT 12.5% – Relevant for hospitality, holiday accommodation and attractions from 1st October 2021 – 31st March 2022, this rate is automatically available within Kashflow. From 1st April 2022 this returned to the standard rate of 20%.
Reverse Charge VAT – This is not as straightforward as the other software options.
- In your chart of accounts, you need to find the codes that you allocate the reverse charge expenses to and make sure the “Area” is Outgoing type.
- Then your purchases raised for Reverse Charge VAT need to have a VAT rate of 20% but the VAT amount needs to be Nil.
Sage
Sage uses a completely different system for coding VAT called T-codes.
T0 – Zero rated sales income and expenses.
T1 – 20% Standard rated supplies on income and expenditure
T2 – For sales or expenditure relating to an Exempt supply.
T5 – Reduced rate of VAT of 5%.
T9 – Outside the scope and will not be included on a VAT return.
T14 – Import of goods – No VAT
T15 – Purchase of services from Rest of world – Reverse charge
T16 – Purchase of services from Rest of world – No VAT
T17 – Import of goods – under import reverse charge threshold of £135
T18 – Import of goods – Postponed VAT Accounting
T19 – Import of goods – VAT no Postponed VAT accounting
T20 – Reverse charge items
T21 – where CIS Reverse Charge Standard Rate applies.
T26 – where CIS Reverse Charge Reduced Rate applies.
For examples of each of these, please refer to the Sage guide.