What is VAT?

VAT (Value Added Tax) is charged on both the supply of goods and services by firms who are liable to charge VAT. Not all companies are registered for VAT and this is usually governed by exceeding the registration turnover limit, although you can make a voluntary registration. This will have a bearing on the way their accounts are completed.

VAT can be applied at different levels i.e. zero-rated, standard, reduced or exempt depending on the transaction and codes T0-T9 are used to determine this. It is important to use the correct code so that the figures on your VAT return are not distorted. Running a VAT return will show the amount of VAT due or the amount which could be claimed back and how it is calculated.

Care should be taken when inputting invoices with VAT to ensure that the final figure corresponds to the invoice. Non agreement will result in not being able to reconcile the bank statement/account. Always adjust discrepancies to agree with the supplier invoice and query with the supplier any large discrepancy.

Here is a list of VAT codes and examples:

Zero rated – Food, Sewage disposal/water, Books, pamphlets and brochures, Newspapers, Maps, Sales outside of EU etc

Standard Rate– all UK Sales – 20% with effect from 4/1/2011

Exempt transactions – 0% Post Office postal costs, Insurance, Bank Charges, Professional memberships, finance charges

Sales to Customers in the EC – where you have received their VAT Code*

Lower Rate – e.g. 5% energy tax

Zero-rated purchases – from suppliers in EC**

Standard-rated purchases – from suppliers in EC**

Transactions NOT involving VAT – Bank Transfers, Salaries, PAYE/etc, Insurance Claims, Loans, Dividends, MOTS, Vehicle Licence duty, Local Authority Rates***

* This tax code can be used for VAT-registered customers outside of the UK but within the EC. You must have the customer’s VAT registration number. If your customer is not VAT-registered, then you should use one of the standard UK VAT rates.

** These tax codes can be used for suppliers outside of the UK but within the EC. In accordance with VAT regulations, EC VAT rate codes used for purchases are given a ‘notional’ rate that is linked to a UK VAT Rate.

*** These transactions are not included on the VAT Return.

VAT is a complex tax. More information at https://www.gov.uk/browse/tax/vat

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