Simple Guide to VAT and Xero
Following Brexit, the VAT rules for supplying goods and services between the UK and EU member states will become the same as the current rules for supplying from the UK to outside the EU.
Before Brexit there was VAT charged between the UK and the other 27 EU countries. Because we were all part of the same market, if a business was VAT registered, they could reverse charge the transaction with no VAT due. Now that the UK is outside of this single market UK VAT is zero rated but VAT has to be paid locally, as well as customs duty.
If you run a business which imports and exports goods or services then we suggest that you familiarise yourself with the new rules, the Enterprise Nation Brexit Hub is a good reference point, as well as the Gov.uk online pages.
In the meantime, this VAT guide is intended to support you with your Xero reconciliations, which will feed into your quarterly VAT returns.
All VAT-registered businesses must charge VAT on their goods or services and may reclaim any VAT they’ve paid on business-related goods or services.
If you’re a VAT-registered business you must report to HMRC the amount of VAT you’ve charged and the amount of VAT you’ve paid. This is done through your VAT Return, which is usually due every 3 months.
If you’ve charged more VAT than you’ve paid, you have to pay the difference to HMRC. If you’ve paid more VAT than you’ve charged, you can reclaim the difference from HMRC.
There are 3 main different rates of VAT and you must make sure you charge the right amount.
Standard Rate 20%
Most goods and services are standard rate. You should charge 20% VAT as the default, unless the goods or services are classed as reduced or zero-rated.
Reduced Rate 5%
This includes children’s car seats, domestic fuel and certain building projects (i.e. installing energy saving products or converting a building from one residential use to another.)
Zero Rate 0%
Zero-rated means that the goods are VAT-taxable but the rate of VAT you must charge your customers is 0%. You still must report them on your VAT Return. Examples include books and newspapers or children’s clothes and shoes, certain food & drink (although this is a complex area).
Most goods you export from the UK to another country are Zero-Rated.
Sales Invoices in Xero
In most cases the invoices you create in Xero should be coded as follows:
- Sales to customers in the UK 20% (VAT on Income)
- Sales to customers in the EU Zero Rated Income
- Sales to customers in the rest of the world Zero Rated Income
This does not mean that the customer has no VAT to pay. Instead they may be charged VAT and customs duty when the goods arrive, this will depend on the country in which they are located.
VAT MOSS is only used where supplies are of digital services to consumers in the EU; it doesn’t apply where the supply is B2B and is instead subject to reverse charge in the business customer hands.
If you sell digital services to consumers in the EU then you will no longer be able to access VAT MOSS via HMRC in the UK and instead you will need to register for VAT in the EU Member State of delivery and then register through that portal for ‘Non-Union MOSS’.
If you supply digital services to consumers via a third-party platform or marketplace, the digital platform is responsible for accounting for VAT on the supply instead of you. For more information visit – https://www.gov.uk/guidance/the-vat-rules-if-you-supply-digital-services-to-private-consumers
EC Sales List
UK businesses are no longer required to complete an EC Sales List when supplying services to businesses located in the EU.
Exempt goods and services
Exempt goods or services are supplies that you cannot charge VAT on.
If you buy or sell an exempt item you should still record the transaction in your general business accounts. Examples of exempt items include:
- postage stamps
- health services provided by doctors
Out of scope
Some goods and services are outside the VAT tax system so you cannot charge or reclaim the VAT on them. For example, out of scope items include:
- statutory fees – like the London Congestion Charge or DVLA costs
- donations to a charity – if given without receiving anything in return
- staff wages & HMRC tax payments
You can usually reclaim the VAT paid on goods and services purchased for use in your business. You must keep records to support your claim, such as a valid VAT invoice or VAT receipt. You cannot reclaim VAT for:
- anything that’s not purely for business (i.e. private use)
- business entertainment costs
- purchases if you use the VAT Flat Rate Scheme (except some capital assets > 2k)
Purchase VAT tax rates in Xero
Xero VAT Rate
Description and Example Purchases
|20% (VAT on Expenses)||Goods & services from UK VAT registered businesses where VAT has been charged at 20%, supported by a VAT receipt|
· Telephone Costs
· Accountancy Fees
· Computer equipment
|No VAT||Costs which fall outside the scope for VAT|
· Wages / Salaries
· Subcontractors (if not VAT registered)
· Director’s Loan transactions
· Bank transfers
· PAYE & National Insurance payments
· Other purchases from businesses which are not VAT registered (i.e. window cleaner)
|Exempt Expenses||· Insurance|
· Medical insurance
· Education (although some staff training may be charged at standard rate)
|Zero Rated Expenses||· Food & drink (unless standard rate VAT rules apply – check the VAT receipt)|
· Goods shipped into the UK from suppliers outside the UK will usually be Zero Rated *
|Reverse Charge Expenses (20%)||Purchases from suppliers outside the UK where you pay and reclaim VAT. In most cases the 2 amounts will cancel each other out.|
* Import statements with VAT and Customs Duty will need to be dealt with separately using a VAT only invoice.
Postponed VAT Accounting
In broad terms, VAT will be payable upon the goods you import, although the UK government has introduced the postponed VAT payment system to avoid cash flow issues. This lets you account for the VAT on your next VAT return, and means the goods can be released from customs without the need for VAT payment at the border.
You will need to register for and download a monthly customs statement from HMRC, which summaries your imports from the month before, in order to reclaim the VAT. Currently an agent cannot do this for you and therefore you should log in and download this report each month and email a copy to a4c for inclusion in your accounts.
How Xero calculates VAT amounts
The VAT return in Xero uses the detail from the reconciled transactions to calculate the VAT return box amounts. This could be taken from sales invoices, purchase bills or bank reconciled transactions.
Xero uses the VAT tax rate selected for each transaction, this then feeds into the relevant boxes on the VAT return.
Quick VAT return summary:
- Box 1 – VAT due this period on sales
- Box 4 – VAT reclaimed in this period on purchases
- Box 5 – The VAT amount payable to HMRC or due as a refund
- Box 6 – Total value of sales excluding VAT
- Box 7 – Total value of purchases excluding VAT
VAT can be a very complex area and will vary from client to client, depending on your industry sector and business model.
At a4c we will support you in the preparation of your VAT returns and are on hand to answer any questions you have in relation to VAT or other areas of your accounts.
01737 652 852 | www.a4cgroup.co.uk