Have you ever felt that feeling of frustration, when you enter all your information into your accounting software and press the generate VAT Return button, only to be greeted with a report that is incorrect?

“Why haven’t some of my purchases been pulled through?”

If you have experienced that situation before then it’ll probably be because you have used the wrong VAT rates within your software.

Why doesn’t my accounting software deal with this for me?

One of the main advantages to a good old-fashioned Excel spreadsheet is that everything is technically in one place and so it’s nice and easy to notice if certain transactions have not been included in the VAT Return in error. Nice and straightforward in theory.

However, as technology continues to evolve, such software providers will require you to complete your VAT Return “properly”. This means that you’ll have to do a bit more legwork in making sure that you have used the correct VAT rates – this in turn will make sure your data is reliable when it comes to submitting the VAT Returns to HMRC.

As technology is more advanced than ever before, and after the development of AI (Artificial Intelligence), most software providers will try to assist by auto-selecting certain VAT rates for expense codes, e.g. insurance will always be defaulted to exempt which is correct.

However, due to the vast variety of different suppliers and services, these default codes may be incorrect, so it is always worth double checking when entering your data!

Does it matter what VAT rates I use? Surely, it’s as simple as something having VAT on or not

From the perspective of what VAT is due, this is kind of correct, however VAT Returns are a little more complex than this.

Selecting “exempt” instead of “zero-rated” will not alter the amount of VAT that you pay across to HMRC, but it will affect the information that is reported when you submit the VAT Return.

As part of their internal checks, HMRC will compare the sales and purchases declared on the VAT Returns to the figures submitted in your Company Accounts. So, any large discrepancies could be flagged up and eventually trigger an investigation into your tax affairs.

So, what are the VAT rates and when should you use them? 

No VAT – The No VAT rate is nice and simple. This is applied to purchases/money paid out that will never have any VAT applied to them and therefore do not need to be declared on your VAT Returns. Items such as bank transfers, wages, dividends, tax payments. Things like that.

Standard Rate (20% VAT) – In theory, all your suppliers who charge standard rate VAT will issue you with an invoice or receipt that shows the amount of VAT deducted. You’ll probably find that the bulk of your purchases are standard rated.

Reduced Rate (5%) – There are a handful of purchases that you may make and will have a reduced VAT rate applied. For most businesses, this is usually your light and heating bills.

Zero Rate (0%) – This is a little more tricky. Zero-rated sales and purchases are those that have VAT on them, but it’s at a rate of 0%. These transactions still however need to be declared on your VAT Return. These day-to-day expenses usually include things such as train travel, flights, books and children’s clothes or shoes.

It’s important to note that if your business sells goods outside of the UK, you will also need to zero rate the goods that are exported to non-EU countries and goods supplied to VAT registered EU businesses.

Exempt (VAT Free) – Transactions that are exempt from VAT are those where no VAT is charged at all, as opposed to Zero Rate whereby VAT is then charged at 0%. Items that are exempt from VAT include things as such postage stamps, insurance, TV licenses and medical care.

So, if you do find yourself puzzled as to why certain transactions are not appearing on your VAT Returns, chances are that the missing transactions will be “hidden” amongst the No VAT entries.

Your Tax Shop hope that this blog provides you with some clarity on the different VAT rates and help you to distinguish between them in the future when it comes to finalising your VAT Returns. Your Tax Shop also understand that VAT can be a very complicated area to get your head around, which is why we’re always on hand to help. If you have any queries or would like to discuss this blog in further detail, then get in touch with our team today on 0161 339 5689 or book a no-obligation appointment – it really is that simple!