Output & Input, Sales & Purchases and box 1 to box 9 are all important factors when putting together a VAT return.
QuickBooks and Xero among others have really opened the floodgates when it comes to selecting a VAT rate for a transaction and each rate will affect the return in a different way. The filing regulations under Making Tax Digital have put a spotlight on the VAT return so it’s more important than ever that any information submitted to HMRC is as accurate as possible.
We hope these brief but informative summaries of different codes will help make your record keeping much quicker and easier. Especially when dealing with transactions that maybe don’t specify a VAT code on the invoice or other transactions such as Wages & PAYE payments.
Please be aware if you are not registered for VAT then the charging, reclaiming and recording of Value Added Tax are not applicable to you, you simply record each transaction as the gross amount without specifying the details of the applicable classification code.
Declared to HMRC
The below codes ensure that each of the net amount and VAT element of a transactions filter through to your return and are declared accurately to HMRC.
20% (Standard Rate)
We can start with an easy one which hopefully will be very recognisable.
This is the standard charge for most products & services that do not fall under other codes.
Most transactions with VAT registered entities will use this code.
It is also the rate most likely to be adjusted by HMRC if rates were revised in the future.
The most recent change came in January 2011 when the rate was increased from 17.5% to 20%.
5% (Reduced Rate)
The reduced rate of VAT is applicable to specific supply of goods and should be made clear on the invoice.
Children’s car seats and domestic energy supply is the most common situation this arises.
0% (Zero Rated)
Zero rated is were VAT is charged but at a rate of 0% most food items and babies’ clothes are a regular example.
Not declared to HMRC
The following codes do not filter through to the return as they have no VAT applicable to them. It’s important to understand the difference between these and the zero-rated code to keep submissions accurate.
Exempt transactions are those that are specifically not applicable for VAT, therefore no VAT is to be charged or reclaimed on these services.
The likes of insurance are exempt from VAT as they hold their own taxation system of IPT (Insurance Premium Tax, currently 12%/20%), this cannot be reclaimed.
Bank Interest and charges as well as postage are exempt from VAT.
Our final group of transactions are those that sit completely outside the scope of Value Added Tax.
Several examples include:
- Wages Payments
- VAT, PAYE & Corporation Tax payments
- Capital Introduced from owners and banks
- Non-business Expenditure
- Cash Withdrawals and Internal Bank Transfers
These have no VAT implications what so ever and therefore do not require disclosure to HMRC.
With many computerised systems each transaction will require a code to be allocated so please be sure that you are comfortable with the different rates available to use.
Always compare the calculated Value Added Tax amount with that of your invoice or receipt as these should match.
If you require any further help or advice or are handling transactions with other EU member states please get in touch on 01472 348608 or email us at firstname.lastname@example.org.
For further information feel free to consult the HMRC website at www.gov.uk/vat-rates
This blog is for information purposes only and D.H. Tuck & Co Limited cannot be liable for any decisions made based on the information published. Processes were correct as at the time of posting. Always seek professional advice when dealing with tax affairs.