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A quick guide to VAT rates in cloud accounting software

Many users struggle with posting VAT entries, especially when using platforms like Xero. Understanding and selecting the right VAT rates is crucial, not only for compliance but also for accurate financial reporting. Here is a concise guide to help you navigate the different VAT rates and ensure you are making the right choices for your transactions.

Understanding VAT rates in the UK

In the UK, there are several VAT rates, each applicable to different types of goods and services. Here is a breakdown with examples:

Standard rate 20%

This rate applies to most goods and services that are subject to VAT. Do be careful when setting up details for a non-VAT registered supplier. If you are linking a data capture app such as Dext with Xero, it should identify whether VAT is included or not. Rules can be set in both Dext and Xero to ensure certain suppliers do not go through to automatically claim VAT. Care also needs to be taken where there is a mix of items on one invoice, for example MOT at 0% and repairs at 20%.

Reduced rate 5%

This rate applies to specific goods and services, such as children's car seats and home energy. Sometimes, you might not see the energy invoice without checking an online account. Instances have occurred where Dext has not had a rule set for a supplier to be 5%, so it has split the invoice between the VAT element being 20% and the balance at 0%. For example, an invoice for £100 at 5% will be £105 (the software may post £25 at 20% for the £5 VAT with £75 as zero rated).

Zero rate 0%

Used for items that are VAT-taxable but at a 0% rate, like most food and children's clothing.  Non-VAT registered suppliers should also be posted to this code. For example, motor expenses typically set at 20% VAT need verification to avoid incorrect postings for unregistered suppliers.

Exempt

Certain goods and services are exempt from VAT, such as insurance, postage stamps and financial services.

Out of scope

For transactions that fall outside the scope of VAT, such as certain financial services, employee salaries, donations, private expenses and loan repayments. In Xero, use the 'NO VAT' rate for these transactions.

Domestic reverse charge

Applicable mainly to the construction industry, this rate is for specific goods and services where both supplier and customer are VAT registered.

Reverse charge

Used for services received from suppliers outside the UK, where the buyer accounts for the VAT. Take care as to whether the VAT on these items can in fact be reclaimed/repaid, as the UK is no longer in the EU for items invoiced from other European countries.

EC sale

This code applies to sales of goods and services to customers in other EU countries. This code still shows, however, since the UK is no longer part of the EU, this rate is less likely to be needed.

The next step

Ensure you stay updated with the latest VAT regulations. If you are ever in doubt, please get in touch with Alison Martin on a.martin@uhy-calvertsmith.com or your local UHY adviser.

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