Staying informed and seeking professional advice if needed is crucial to ensure compliance. By consulting with professionals, businesses can confidently navigate specific VAT systems and ensure accurate VAT treatment for their goods and services. By doing so, businesses can ensure that they are applying the correct VAT treatment to their goods and services, preventing potential compliance issues and financial penalties. Determining whether items are zero-rated or exempt from VAT is a crucial aspect of VAT compliance. To classify items accurately, consulting with VAT specialists or reviewing the relevant legislation is advisable. In this section, we'll provide guidance on identifying eligible items and seeking expert advice to ensure accurate VAT treatment and compliance with specific VAT rules.

Expenses where you DON’T pay VAT

If you would like to report on something other than a VAT period or perhaps just a certain type of transaction you will need to try a different route. This is where the Account Transactions report will help you find No VAT xero no vat or zero rated transactions in Xero. This is a process you would expect all good bookkeeper and accountants to do as part of the VAT return submission.

This will include the sale on your EC Sales List within Xero and include the sale in Boxes 6 and 8 of 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.

The seller will not charge their customers any VAT, but they also won’t be able to reclaim any VAT paid on costs related to these goods or services. As a result, zero-rated VAT can be a valuable benefit for businesses, especially those operating in industries heavily reliant on inputs subject to VAT, such as manufacturing or construction. It can improve their cash flow and competitiveness by reducing their tax costs and ultimately enabling them to offer more competitive prices to consumers.

Transfers between bank accounts, tax payments to HMRC, and director/shareholder by drawings/dividends are all examples. 20.0% RC (0%) – This is to be utilised for reverse charge expenses at a rate of 20.0& RC (0%). No VAT (0%) – these transactions will not display on your VAT returns because there is no VAT (0%).

GDPR and online accounting + Small Businesses

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.

Seeking expert advice

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.

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.

VAT Exempt and VAT Zero Rated - What's the Difference?

Salaries, savings to pension schemes and such like are outside the scope of VAT legislation. Non Vatable items do not appear anywhere on your VAT return, however, the MTD system should record that the transactions have been made and that VAT has not been accounted for. The majority of supplies are subject to the Standard 20% VAT rate, although in rare cases, the Reduced VAT rate of 5% is applied to the delivery of energy (and for certain food sales). If your business incurs more input VAT (VAT on purchases) than you charge in output VAT (VAT on sales), you may be eligible for a VAT refund.

• The biggest area of confusion is between the No VAT, Exempt and Zero rated.
• 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.
• Exempt – this should only be used if your company manufactures exempt goods.

The majority of supplies are subject to energy (and for certain food sales). Use the right rate when making a VAT-able supply or incurring an expense with a VAT component. VAT codes and rates are handled differently by different accounting software products. This simple guide should help you figure out which rate to use in which situation.

I won’t go into detail about zero-rated VAT or exempt VAT in this article. If you wish to find out more on this subject, you can read this guide on the differences. Anything that does not fall into the above should have VAT charged at 20%. VAT is not charged if goods are exported outside the EU provided you keep evidence of the export.

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.

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.

• Be aware of any changes or updates to VAT rules in the country or countries you're operating in, as they can vary over time.
• By consulting with professionals, businesses can confidently navigate specific VAT systems and ensure accurate VAT treatment for their goods and services.
• This code is no longer used for businesses based in the UK post-Brexit as box 8 and 9 on the VAT return don’t need to be completed anymore unless your business is based in Northern Ireland.
• It’s crucial for businesses to accurately classify their goods and services to ensure they are applying the correct VAT treatment.

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.

Is time up for Cloud Based accounting?

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.

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.