Common exempt business expenses include postage, insurance and some professional membership subscriptions. There are three different occasions where there may not be VAT charged on goods or services that carry different rates of VAT. It doesn’t mean there is ‘no VAT’ and it certainly doesn’t mean you should use the No VAT tax rate in Xero for them all. If you are using a journal to post a transaction into Xero, then yes it would be correct to apply the correct VAT tax rate. An example might be that you enter expenses or petty cash via journal and there is VAT to reclaim. Goods that are sold to a VAT registered business in the EU can be zero rated (Zero Rated EC Goods Income in Xero).
What is outside the scope of VAT?
To summarise for outside-the-scope transactions VAT doesn’t apply at all to these goods or services sold so you do not add VAT to your sales price and no VAT can be reclaimed on the purchase. One of the biggest misconceptions when completing the bookkeeping for your small business is £0 VAT equals ‘No VAT’ in Xero. When using Xero as your bookkeeping software you could be enticed to use the No VAT tax rate for all transactions that have no VAT. The reduced rate of 5% is used for some items including domestic fuel and some environmental supplies used in the construction industry. Over the last few years, I have seen VAT incorrectly recorded for a variety of reasons. Mistakes happen and are easily corrected but it is clear that some of our clients and bookkeepers they have used in the past don’t understand how to record VAT correctly.
When to Use No VAT in Xero
The customer’s VAT number and your VAT number should be shown on your sales invoice to be classed as a business sale. At monthly or quarterly intervals an EC Sales List should be filed to declare any sales to EU businesses. In B2B transactions, it is the customer who must account for any VAT due via the reverse charge mechanism.
Pensions and inheritance tax
Please be sure to double-check with your accountant, bookkeeper, or the tax office if you are unsure what VAT tax rate you should be applying to your supplies. Items that are zero rated have a VAT rate of 0% applied to them. This is different from exemption although it has the same effect on what is owed to or from HMRC.
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”. Understanding the differences between VAT exemption and zero-rated VAT is crucial for businesses.
VAT Rate Confusion No VAT vs Exempt vs Zero Rated
- Maintain thorough records of all transactions involving zero-rated VAT.
- In the report above I have chosen a date range and grouped my transactions by the VAT rate name which is No VAT.
- Exempt VAT means that certain goods and services are not subject to Value Added Tax.
- This is the easiest way as it will document all of the transactions for a period.
- As how this are recorded is stored in your software’s MTD system, getting right is important.
A taxable person is an individual, firm, company and so on who is, or is required to be, registered for VAT. A person who makes taxable supplies above certain value limits is required to be registered. Whilst many business transactions might have £0 VAT that is not the same as No VAT. Exempt items are different from zero-rated supplies which are different from outside the scope of VAT yet they all mean £0 VAT from a monetary point of view. In order to know when you should use No VAT in Xero you need to understand what is outside the scope of VAT.
It’s not always obvious what the difference between No VAT in Xero is versus zero-rated and exempt VAT. It’s probably not something you have ever thought too long and hard about because it all equates to the same thing – nothing is being charged to the customer and nothing to reclaim on purchases. When recording transactions we are aware that some items fall under the scope of VAT legislation and others don’t.
- We specialise in supporting VAT-registered limited companies – we’d love to speak to you about your business, please get in touch to book in a discovery call to see how we could help.
- This is where the Account Transactions report will help you find No VAT transactions in Xero.
- Exempt items are different from zero-rated supplies which are different from outside the scope of VAT yet they all mean £0 VAT from a monetary point of view.
- When you make a sale that qualifies for zero-rated VAT, you must issue an invoice to your customer that clearly indicates the VAT rate of 0%.
Impact on VAT reclaims
This process involves filing a VAT refund claim with your local tax authority, and the rules and procedures can vary from country to country. On the other hand, VAT-exempt supplies do not enable VAT reclaims, which xero no vat or zero rated can result in additional irrecoverable costs for businesses. This distinction is crucial for businesses to comprehend when dealing with VAT reclaims and determining their overall tax liabilities. The supplier does not charge VAT but as the customer you account for it as both a sale and a purchase on your VAT return. (The exception is if you’re partially exempt business for VAT purposes – speak to your accountant).
The original transactions posted into your Xero records such as invoices and bills should have the correct VAT treatment applied to them. You would need to make sure you have a way of recording the different types of sales so you could prove this calculation and monitor it as the VAT registration is based on a rolling 12-month basis. Supplies which are made in the UK or the Isle of Man and which are not exempt are called taxable supplies.
Exempt
You should use this rate if a supplier is not VAT registered and the supply would otherwise be liable to VAT. Reverse-Charge Expenses (20%) – some service providers are located outside of the UK. Many of these services are provided by companies who do not register for VAT in the UK and hence do not charge VAT. Instead, as a consumer, you must follow the reverse charge guidelines. 20.0% S (20%) and 5.0% R (5%) – the Standard and Reduced VAT rates in the UK are 20.0% S (20%) and 5.0% R (5%).
If the customer is not VAT registered, then the applicable UK rate of VAT is charged. Zero-Rated – when the supply of items is Zero-Rated, such as children’s clothing, basic foods, books and newspapers, this term is utilised. Use ‘Zero-Rated Expense’ if an expense was Zero-Rated if the supplier was not VAT-registered. No VAT – these transactions will not appear on your VAT returns since they are not subject to VAT. On transactions that aren’t subject to VAT, this code should be used.
Again this will include the sale on your EC Sales List within Xero, include the sale in box 6 but not in Box 8 (as the place of supply is with the customer). Sales to non VAT registered consumers are treated like a sale to a UK customer with 20% VAT added to the net amount as normal. However if you have a high value of these types of distance sales then you may need to register for VAT in the EU country and charge the relevant VAT. If your EU sales are over £250k per year then you also need to file an Intrastat Supplementary Declaration. Maintain thorough records of all transactions involving zero-rated VAT.
IRIS Kashflow provides a very simple VAT accounting system where only the rate is provided, and it is set up with a huge variety of rates that are unlikely to apply to you. These differences substantially impact businesses and consumers, particularly in the context of reclaiming input VAT. You may find you commonly use this code for software advertising services such as Google ads and Facebook ads which are based in Dublin. There won’t be any VAT to reclaim and purchases using this code won’t appear at all on your VAT return. When posting journals in Xero you are more than likely going to be creating entries that you will not want to record on a VAT return such as accruals, prepayments, and wages.
