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VAT

UK VAT Rates and VAT Returns

UK VAT Rates

Standard rate is 20%

This is the standard VAT rate for a majority of expenses, and

The standard VAT rate for the majority of income

Exempt Expenses

Examples include bank fees and insurance payments

Zero Rated Expenses

Transactions with no receipts

Supply from suppliers who are not VAT registered

No VAT

Transactions with No VAT will not be included in any calculations for producing the VAT return, unlike Exempt / Zero Rated expenses

Examples - Salary payments, Bank transfers

VAT Returns

What is a VAT Return?

A VAT return is a record of the VAT on all sales less the VAT on all purchases in a period, that is submitted to a tax organisation* to calculate how much VAT a company can reclaim or needs to pay back for that period.

*HMRC in the UK or the relevant tax authority in any of the EU member states

What is calculated on a VAT return?

The amount to be paid to or reclaimed from the tax authority is calculated as:

The sum of Output VAT (VAT on Sales) Less Input VAT (VAT on Purchases)

If the Output VAT is greater than the input VAT, you'll owe tax to HMRC. If the Input VAT you can claim is greater than the output VAT you owe, you'll be due a repayment from HMRC.

UK VAT Return - What goes in Boxes 1-9?

Below is a summary of what goes in each box on a UK VAT return. Some specialised transactions have different VAT treatment so it is always best to check the

gov.uk⁠

website if you are completing it for a business for the first time.

Box 1 - VAT received in the period on sales and other outputs (plus VAT on purchase of services under reverse charge rules)

Box 2 - VAT due in the period on acquisitions of goods made in Northern Ireland from EU Member States*

Box 3 - Output VAT - the total VAT due, that is, boxes 1 and 2 added together

Box 4 - Input VAT - VAT paid out in the period on purchases and other inputs (including acquisitions from the EU and VAT on purchase of services under reverse charge rules)

Box 5 - net VAT to pay to HMRC or reclaim. Take the figures in boxes 3 and 4. Deduct the smaller from the larger and enter the difference in box 5.

Box 6 - total value of sales and all other outputs, excluding any VAT (excluding exports** but including the value of services purchased under reverse charge rules, and including the value of any services supplied under reverse charge rules)

Box 7 - the total value of purchases and all other inputs excluding any VAT (including imports*** and including the value of services purchased under reverse charge rules)

Box 8 - total value of all supplies of goods and related costs, excluding any VAT, from Northern Ireland to EU Member States*

Box 9 - total value of all acquisitions of goods and related costs, excluding any VAT, from EU member states to Northern Ireland*

*For many UK businesses boxes 2, 8 and 9 will be nil, unless it has a business unit which operates in Northern Ireland

** Exports are defined as: goods that are supplied from England, Scotland or Wales to customers outside the UK, or goods supplied from Northern Ireland to customers outside the EU.

***Imports are defined as: goods and related costs that you buy for your business from suppliers outside the UK or if you are bringing these into Northern Ireland, goods and related costs that you buy for your business from suppliers outside the EU.

Reverse charge rules:

Under the reverse charge rules, the buyer of the goods or services, rather than the seller, is liable to account for the VAT on the sale.

Reviewing a VAT return - quick checks:

Check for manual journals posted to VAT in the account transactions report in Xero

Check any invoices/bills posted to boxes 8 & 9 - these trigger additional reporting requirements

Review the VAT return for any suppliers with transactions posted across several VAT codes

For Reverse Charge invoices, spot check to ensure the invoices show the company's VAT number and the reverse charge clause

All salaries, NIC/PAYE and other payments to control accounts where the VAT has already been recognised by journal, accruals, prepayments journals etc. should all be booked with No VAT, these should not appear anywhere on the VAT return.

Reviewing a VAT return in Xero

The format of the VAT report from Xero doesn't make it particularly easy to check, it's easier to download the account transactions for the period using the report in Xero with VAT details on each line then you can sort by Description to allow you to check by supplier.

NB: Filtering for the same quarter as the VAT return will exclude any transactions included in Late Claims.

⁠

HMRC VAT Audit

If you happen to be pulled out for an HMRC audit, this is typically the information requested;

A VAT audit trail detailing Sales and Purchases that make up the figures on the return

Copies of 6 purchase invoices showing the highest value of VAT

Copies of the 6 highest value zero-rated sales invoices

Copies of 6 Sales invoices showing the highest value of Sales

Please tell us the reason for the repayment and whether you expect to receive regular repayments in the future.

Please confirm your main business activities.

If you made a mistake..

VAT is not the most straightforward of taxes, and mistakes can happen... HMRC can be quite sympathetic if they do, despite it seeming like they make it excessively complicated to trick people out!

Where errors occur and are spotted on VAT returns that have been submitted, you should let HMRC know as soon as possible, with a grovelling explanation, then keep your fingers crossed you won't end up with a fine.

Depending on the total value of the VAT due to be paid/reclaimed, there are two options for correcting past VAT returns:

You can include the correction in the VAT return for the period in which the error is spotted, or

You can fill in a form explaining the error(s) and the total VAT over/under-declared

Full details can be found

here⁠

Special VAT rules

You cannot reclaim input VAT on any

client/customer entertaining⁠

, but you can on staff entertaining

There are special rules for calculating input VAT to reclaim on

company cars⁠

staff travel expenses⁠

and for businesses which sell a mix of exempt and non-exempt products & services.

Postponed VAT

❗To avoid paying import VAT altogether as a VAT registered business, HMRC has introduced Postponed VAT Accounting. This means that import VAT can be accounted for on the VAT Return in the following boxes.

It works very similarly to the reverse charge mechanism with the net effective being no physical payment of import VAT.

Box 1 – VAT due on sales and other outputs: Include the VAT due in this period on imports accounted for through postponed VAT accounting.

Box 4 – VAT reclaimed on purchases and other inputs: Include the VAT reclaimed in this period on imports accounted for through postponed VAT accounting.

Box 7 – Total value of purchases and all other inputs excluding any VAT: Include the total value of all imports of goods included on your online monthly statement, excluding any VAT.

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