EC acquisitions (Zero Rated) used for purchases made from suppliers in EC. Items which need to be reported on the VAT return, such as children’s clothing, books, newspaper, travel, most foods, medicine, sales to countries outside the EU. Book a free call with one of our VAT experts to find bespoke solutions for your business, optimize your VAT costs, and reach millions of new potential customers.
Seeking expert advice
This includes invoices, receipts, and any other relevant documentation. Proper record-keeping is essential for audits and tax inspections. Given the intricate VAT rules and the differences between zero-rated and exempt items in the EU and elsewhere, businesses might find various VAT systems challenging to navigate. Understanding the implications of zero-rated and VAT-exempt supplies requires a grasp of the key differences between the two concepts.
Keep accurate records
- 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.
- And, ultimately, keeping on top of your VAT, having the right receipts and claiming back the tax you’re due is a great way to improve the cash situation in your business.
- Zero-Rated – when the supply of items is Zero-Rated, such as children’s clothing, basic foods, books and newspapers, this term is utilised.
- In order to know when you should use No VAT in Xero you need to understand what is outside the scope of VAT.
VAT exemption is a mechanism that allows certain goods and services to be exempt from VAT altogether. This means that when a business provides a VAT-exempt product or service, it doesn’t charge VAT to the customer, and it cannot recover any VAT incurred on related expenses. However, this doesn’t mean the business can’t claim VAT refunds for other taxable activities. If your business purchases services from outside the UK then it will need to apply what is known as the “reverse charge”.
Let us move on to what is deemed outside the scope of VAT and when you should use No VAT tax rate in Xero. The biggest area of confusion is between the No VAT, Exempt and Zero rated. As how this are recorded is stored in your software’s MTD system, getting right is important.
- We hope this whistle-stop tour of the different VAT codes for expenses has given you a better grasp of how to enter your expenses in Xero – there’s even more guidance in our VAT FAQ section.
- Use the right rate when making a VAT-able supply or incurring an expense with a VAT component.
- 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.
- These codes are used when you must account for VAT on services that you buy from businesses who are based outside the UK.
There are lots of anomalies in VAT which is what makes it complicated. You can always check the HMRC website or ask your accountant if you’re not sure. This code is for “Out-of-Scope VAT” which basically means VAT doesn’t apply at all and falls outside of the UK VAT system. Use this for salaries, payments to HMRC, dividends to directors and NI/PAYE contributions. Here’s our Xero VAT code cheat sheet for your purchases to avoid those VAT-induced headaches. Before deciding what is outside the scope of VAT to use No VAT in Xero correctly, we first need to understand some of the basics such as what VAT is.
If the supplier is not VAT registered, use this code for both zero-rated sales and zero-rated expenses. While businesses do not collect VAT on zero-rated supplies, they still incur VAT on their purchases and operational expenses. These businesses are entitled to reclaim the VAT they have paid on inputs, which includes everything from raw materials and equipment to office supplies and services. This mechanism allows businesses to recover the VAT they have paid throughout the supply chain, thereby reducing their overall tax liability. So this one’s easy – most sales of goods and services in the UK are subject to VAT at the standard rate of 20%. Use this code for the bulk of your business expenses where you have been charged VAT and have a valid VAT invoice to reclaim the VAT.
Goods that are typically zero-rated include basic foodstuffs, prescription medicines, books and educational materials, public transportation, and exports. Meeting your key strategic objectives is far easier when you know WHY you’re in business, and what you’re aiming to achieve as a company. With this in mind, here’s our quick overview of the main VAT codes and when you’ll need to use them. If these terms and concepts are not familiar to you then seek help from your bookkeeper or accountant before posting any journals. There might be valid reasons to register for VAT voluntarily and you can read more about them in our pros and cons of being VAT registered guide.
Exempt
We believe we are more than just your average accountancy firm. For a more detailed guidance on VAT rates please see HMRC’s website, VAT rates on different goods and services. We hope this whistle-stop tour of the different VAT codes for expenses has given you a better grasp of how to enter your expenses in Xero – there’s even more guidance in our VAT FAQ section. Something we get asked a lot is ‘Which VAT code should I use in Xero when entering expenses? Getting your head around how VAT works in Xero, and using the right codes from the start, will certainly reduce any VAT headaches in the long run.
Here at FD Works we’re an ambitious team of accountants and business advisors based in Bristol and Bath. We help business owners and their teams identify the drivers of opportunity in their business, empowering them to make bold decisions and grow their venture. 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. Advice for small business owners from accounting, tax, Human Resources, and much more.
When to Use No VAT in Xero
While these mechanisms serve different purposes, they both aim to ensure that essential goods and services are more accessible and affordable. However, the distinctions in VAT recovery and tax rates can have significant implications for businesses, so it’s essential to correctly categorize supplies to comply with VAT regulations effectively. Conversely, exempt supplies do not enable businesses to reclaim VAT, which can lead to higher costs for both businesses and consumers. It’s crucial for businesses to accurately classify their goods and services to ensure they are applying the correct VAT treatment. If your business is VAT registered then it is vital that you charge the correct rate of VAT to your customer to ensure that you file the relevant information with HMRC. There are different rules based on whether you are selling goods or services, selling to businesses or individuals and selling to the UK, EU or the rest of the world.
Do outside the scope of VAT sales count towards the VAT registration threshold?
This will include the sale on your EC Sales List within Xero and include the sale in Boxes 6 and 8 of xero no vat or zero rated your VAT return. The sale of digital services to non VAT registered customers in the EU fall under the VAT MOSS rules (discussed in another post here). The first stage is to decide whether you are selling to consumers or businesses. For EU VAT purposes this depends on whether they are VAT registered or not. If they have a VAT number they are classed as a business and if they don’t have a VAT number they are classed as a consumer.
Navigating VAT rules for zero-rated and exempt items
Purchases that you do not have a VAT receipt for are recorded as Zero Rated. These still appear in the VAT totals, but you cannot reclaim the VAT that you may (or may not) have paid on these. You record them as Zero Rated irrespective of who the supplier is and irrespective of whether the supplier is VAT registered or not. Sales and Purchases of exempt items still appear in the totals figures on the VAT return, however no VAT is collected or paid on these items. Exempt items include bank fees, insurance, postage stamps amongst other things. Goods that are supplied from the UK fall under the UK VAT rules where the seller is based.Services are assumed to be provided where the customer is based and so fall under the VAT rules in that country.
These tax codes are used for standard rated goods and services, such as repairs and maintenance, telephone, rent. Domestic reverse charge applies where two businesses are VAT registered and are trading within the construction industry scheme(CIS). Always check the invoice to see if the supplier has charged VAT or not as if they are not VAT registered there will be no VAT number and no VAT to reclaim. 0% – for both Zero Rated and Exempt supply and expenses, this should be utilised.
While zero-rated supplies are subject to VAT at a 0% rate, an exempt supply is not incorporated into the taxable turnover and is not subject to VAT at all. Whilst you will see the No VAT transactions on your VAT return report for transactions by tax rate do not confuse this with them being included in your VAT return box 1 to 9 figures. If you were to check the transactions by VAT box tab you will notice this reports on the transactions that make up each of your boxes on the VAT return.
