VAT

If you are not registered for V.A.T., you should not charge V.A.T. on your sales and cannot claim any V.A.T. on your purchases and expenses.

In Parameters > General > V.A.T. Reporting Periods, you should leave the period fields blank as your business will not be required to produce V.A.T. returns. and in V.A.T. Rates & Default V.A.T. Codes, set the Default V.A.T. code to N for Sales Ledger, Purchase Ledger and Cash Book.

Process all your transactions with V.A.T. code N and don’t enter any V.A.T. amounts for expenses & invoices from your suppliers and don’t charge V.A.T. on your invoices to your customers.

If you have any doubt, you should consult your bookkeeper, accountant or your Prelude distributor.

VAT – Value Added Tax was introduced in 1975 and replaced Purchase Tax, which was mostly on luxury goods. At that time Income tax was 33% and the first rate of VAT was 12.5%. Since then VAT rates have risen and Income rates have fallen. VAT income now accounts for about 1/3rd of taxation income.

The VAT legislation is extensive and is published by HMRC as VAT Notices. VAT Notice 700 – VAT Guide is the starter which all VAT registered persons should read. There are now over a hundred VAT notices covering all forms of trading – even the trading in racehorses. All the VAT notices are listed on HMRC’s website and details of the contents are extensive. If you have a query and you can’t find the answer then they also list helplines.

What is VAT? A company purchases raw materials e.g. rolls of cloth and converts these to shirts using labour and overheads then sells these to a chain of shops at a profit. VAT is chargeable on the shirts sold and the amount paid on the rolls of cloth is set off against it. The output tax (on the shirts) less the input tax (on the cloth) creates a tax on the amount of the increase between the purchase and the other costs plus profit – i.e. the value added to the cloth. This is why it’s called Value Added Tax.

What are the different schemes?

Prelude deals with a number of schemes – Standard Invoicing Accounting, Standard Cash Accounting, Standard Flat Rate, Cash Flat Rate and elements which are not really schemes – Reverse Charge Accounting for transactions with the EC.

Other schemes which will be introduced as the need arises are: Margin Scheme for second hand goods and covering things like artistic works; Margin Scheme for second hand cars, which is slightly different; Retail schemes – there are five of these and the Domestic Reverse Charge for the construction industry that should have been introduced in October 2019 but has been postponed to October 2020. All of these schemes and others are covered by VAT notices. The introduction of making tax digital in April 2019 is itself covered by VAT notice 700/22.

What are the various VAT Rates and what do they cover?

This topic is huge and we can only give an idea – if your sales or purchase are out of the ordinary please refer to your accountant for advice.

Zero rated VAT – VAT Code 0 in most systems. This is actually a chargeable VAT code – and could rise from 0.00 to any rate. It is used primarily for foodstuffs (not cooked) and not confectionery. It is also used for imports and exports to countries outside the EC, books, safety wear and some clothing. If you are in catering or retail you will need to know what is and isn’t zero rated.

VAT Code 0 does not include a lot of expenses that go through the cash book – bank charges, wages, HMRC payments etc. Generally speaking, if you don’t have a VAT invoice for the payment or receipt you process it with VAT Code N.

Standard Rated VAT – VAT Code 1 in most systems. This is generally the most used if you are VAT registered. Currently the rate of VAT is 20% but can change. Most purchases and sales within the UK are charged at standard rate.

Reduced Rate VAT – VAT Code 2 in Prelude but Vat Code 5 in many other systems. This is limited to utilities such as Gas and Electricity and certain fuels. Currently this is 5% ,but can change.

VAT on EC Sales – no fixed code in Prelude but often VAT code 4 in other systems. The rate is 0.00% and is chargeable on sales to EC countries. The VAT is not included on the VAT return but the Nett sales are – VAT Return Box 8. Details of these sales are also submittted quarterly on an EC Sales List.

VAT on EC Purchases – no fixed code in Prelude but often VAT code 7 in other systems. The rate is 0.00% and is chargeable on purchases from to EC countries. The VAT is effectively not included on the VAT return but the the value of purchases which is shown on the VAT return (VAT Return Box 9) is deemed to be taxable and the value of tax at standard rate is shown in the tax return Box 2 and added to Box 4 to offset it. Prelude Desktop and Cloud use the Default Purchase Ledger Code so please ensure it uses the standard rate.

Some services and purchases from the EC are classed as reverse charges. These are treated in a different way to other purchases. These are not included in Box 9 and two but are added to Boxes 1, 4, 6 and 7. To cater for this, these are posted as VAT code S. There are other reverse charge arrangements for Gold and Mobile phones, which are treated in the same way but have their own VAT codes. The VAT on these is calculated at the standard rate.

Exempt VAT – A huge topic with companies who supply exempt supplies and partially exempt. Generally expenses for insurance, finance, education and memberships of trade organisations. In Prelude, as in most other systems, it is VAT code E. There is no VAT chargeable on these expenses and they DO NOT appear on the VAT return.

Outside scope of VAT – Certain items, such as MOTs, Road Fund Licences, Postage, are outside the scope. this is recorded in Prelude as VAT code N. There is no VAT chargeable on these expenses and they DO NOT appear on the VAT return. Purchases from exempt suppliers and non-registered suppliers are also outside the scope but the purchases are included in Box 7. Use the standard VAT Code but enter Nil VAT. Inter-company transactions are not included in Box 7 and should be VAT Code N.

Other Notes

• The date you despatch your goods is the date of taxable supply and is the date you should put on your invoice.
• Every invoice and credit note should show your VAT registration number. If you trade with EC you should prefix your VAT number with GB.
• If you import you should ensure your supplier shows their VAT number on their invoice or you may become liable for VAT.
• For small amounts you can show VAT-inclusive prices and not show the VAT – however the invoice must show the VAT number and date. You may well receive such invoices and whatever VAT is included you can claim back.

This article is not to be read as being a true guide, as VAT is constantly changing and if you become VAT registered you have a responsibility, under law, to account for it properly. There is considerable information on the web and your accountant can guide you. There is also a lot of futher information in these help pages. The paragraphs highlighted above are where most errors ocur.

In the UK, HMRC offers a number of different schemes to businesses to account for and pay their V.A.T. liabilities. The two main schemes are Invoice (or Standard) Accounting and Cash Accounting. Other schemes are essentially variants of one of these two.

Using Invoice Accounting you pay V.A.T. on your sales whether or not your customers have paid you. You also recover V.A.T. on your purchases whether or not you have paid your suppliers.

Using Cash Accounting you pay V.A.T. on your sales only when your customers have paid you. You also recover V.A.T. on your purchases only when you have paid your suppliers.

With Cash Accounting you only have to pay your V.A.T. liability when you have received the money from your customers with which to cover the V.A.T. payment less the V.A.T. element on payments to your suppliers. This can help your business cash flow, especially if you offer good credit terms to your customers.
With Cash Accounting you have automatic bad debt protection on the V.A.T. element of your customer debts. If a customer doesn’t pay you and you have to issue a credit note or write off the debt, with Invoice Accounting you will have already paid the V.A.T. on that customer debt and will only get it back via the credit note in your next V.A.T. return. With Cash Accounting, you won’t have paid the V.A.T. liability as the customer will not have paid you.

Which scheme should you use?
Because of the difference described above, it is nearly always beneficial to use the Cash Accounting scheme if your business is permitted to do so. There are restrictions on which businesses are permitted to use the Cash Accounting scheme for V.A.T. Click on the link below to be taken to the HMRC web site for more details. You should consult your bookkeeper or accountant if you have any doubt.

http://www.hmrc.gov.uk/VAT

Configure your system for your chosen scheme
Once you have chosen the scheme that is appropriate for your business, it couldn’t be easier to effect this in your product –

• See V.A.T. Rates & Default V.A.T. Codes for how to do this.

How does it work in Prelude?:

• Invoice accounting VAT returns are based on VATAUDIT
• Cash accounting VAT returns are based on VATCASHAUDIT
• VAT returns for transition between schemes are based on a combination of both tables
  o I to C removing transactions that were previously reported under Invoice accounting that have not yet been paid/matched
  o C to I adding transactions that were previously not reported under Cash accounting that are still not yet paid/matched

All VATable transactions are always posted to VATAUDIT.

VATable transactions are posted to VATCASHAUDIT only when they are paid/matched

• Nominal payments are always posted to VATCASHAUDIT
• Journal postings to the VAT Control account are always posted to VATCASHAUDIT, but VAT amount only of course, and ideally they should not be used
• Invoices posted as paid are posted to VATCASHAUDIT pro-rata with the payment amount if not paid in full
• Matched invoices/credit notes are posted to VATCASHAUDIT pro-rata with the matching amount

Matching is the trigger for posting ‘credit’ transactions (i.e. invoices and credit notes) to VATCASHAUDIT

• So unmatched customer/supplier invoices/credit notes are not included in the Cash accounting VAT return but unallocated cash will be added as an adjustment to the VAT reports to be included in the return
• Acquisitions from EC will always be treated as invoice accounting and as such are included in both tables
• This in total then meets all the needs of HMRC

Overview

The amount of VAT a business pays or claims back from HM Revenue and Customs (HMRC) is usually the difference between the VAT charged by the business to customers and the VAT the business pays on their own purchases.

With the Flat Rate Scheme:

you pay a fixed rate of VAT to HMRC which is less than the standard rate and may reduce after the first year
you keep the difference between what you charge your customers and pay to HMRC
you can’t reclaim the VAT on your purchases - except for certain capital assets over £2,000

To join the scheme your VAT turnover must be £150,000 or less (excluding VAT), and you must apply to HMRC.

Talk to an accountant or tax adviser if you want advice on whether the Flat Rate Scheme is right for you. It is particularly useful for small businesses who charge for time and have few purchases.

See also Flat Rate Scheme in the Making Tax Digital section. Other schemes are also detailed in the section.

Your software can calculate the figures you should use on your V.A.T. Return. For further details go to https://help.prelude.software/knowledge-base/vat-form/

Configuring your product for your business V.A.T. reporting is introduced in V.A.T. Rates & Default V.A.T. Codes.

Your product is installed with the default V.A.T. Code 1 set at 20.0%

If legislation changes the standard rate for V.A.T., you need to reflect this in the software in a way that makes it clear which transactions are processed at which rate during the transition V.A.T. reporting periods.

We recommend one of the following two methods. Which you use is your choice.

METHOD 1 – USE A NEW CODE FOR THE NEW V.A.T. RATE

• Use a new Code for the new rate, say V.A.T. Code 3, leaving V.A.T. Code 1 at 20.0%.
• Continue to use V.A.T. Code 1 until the changeover date and then carry out the following actions:

• If using the Product or Stock file, change the default V.A.T. Code for each Product/Service or Assembly to V.A.T. Code 3 unless the product/service has another default such as zero rated or exempt; in which case it does not need to be changed.
• If you have default V.A.T. Codes for individual Sales and Purchase ledger accounts, ensure that these are changed to V.A.T. Code 3 unless they have another default such as zero rated or exempt; in which case it does not need to be changed.
• Check the default sales V.A.T. Code in Sales Ledger parameters and change to V.A.T. Code 3 if your usual output supplies are subject to the standard rate of V.A.T.
• Re-enter or amend any sales orders for standard-rated goods to be delivered and invoiced after the changeover date to V.A.T. Code 3. You will need to co-ordinate with your business customers to resolve any discrepancies.
• Check the default purchase V.A.T. Code in Purchase Ledger parameters and change to V.A.T. Code 3 if your usual input supplies are subject to the standard rate of V.A.T.
• Re-enter or amend any purchase orders for standard-rated goods to be received and invoiced after the changeover date to V.A.T. Code 3. This will depend on and will need to agree with the purchase invoice subsequently received from your supplier.

• You will need to co-ordinate with your business suppliers to resolve any discrepancies. It may be necessary to cancel existing outstanding orders and re-issue them with the new VAT code and VAT amount.

• Check the default Cash Book V.A.T. code in the Nominal Ledger parameters and change if necessary.

• Finally check your Stationery designs. If there is mention of the V.A.T. rate entered as a text field in the document design then you should change this accordingly.

This method might be more appropriate for your business if the rate change is temporary.

METHOD 2 – CHANGE EXISTING DEFAULT V.A.T. CODE TO THE NEW RATE AND ADD NEW V.A.T. CODE FOR 20.0% RATE

For all transactions after the changeover date:
– Change the existing V.A.T. Code 1 to the new rate
– Set up V.A.T. Code 3 as 20.0%

• Check your Stationery designs. If there is mention of the V.A.T. rate entered as a text field in the document design then you should change this accordingly.

This method might be more appropriate for your business if the rate change is permanent.

N.B. With either method, if you are maintaining V.A.T.-inclusive selling prices in the Product/Stock file (check Product/Stock parameters), in order to pass on the effect of the rate change to your customers, you must change the selling price accordingly, as the V.A.T. element is calculated as a percentage of the selling price.

Take extra care with credit notes issued against invoices issued at the old rate – take advice if necessary – the usual rule is – when is the point of supply?

Please Note:
This advice is not meant to be a definitive or exhaustive guide. Prelude Software Ltd accepts no liability for any time, costs or expenses you may incur in effecting the change of standard rate V.A.T. for your business or in the resolution of any disputes you may have with your customers or suppliers.

If you have any doubt, you should consult your bookkeeper, accountant or Prelude supplier.

This could happen for a number of reasons, all of which are normal behaviour when communicating with the HMRC MTD database.

The cause is unlikely to be an error with our software, as HMRC communcations have been tested thoroughly, and temporary outages or authentication errors are to be expected from time to time. For example:

• If you are setting up Making Tax Digital for the first time, it may be a registration issue – more details can be found here https://help.prelude.software/knowledge-base/error-messages/
• If you have successfully submitted your MTD VAT Returns for some time, it may be that you have to re-register your connection. This is probably the case if you receive a 403 error – See https://help.prelude.software/knowledge-base/the-process-for-accountants-and-businesses/ and scroll to ‘Re-registration’ to find out more.

On some systems the way it’s configured prevents the necessary Automation folders to be created. This only happens the first time the process is used and once the folders have been created there should not be an issue. You should receive this message Could not create local MTD folder. VAT Return has NOT been closed.’

If the button does not allow the ‘Update VAT filer’ to function and you receive the message, go to your C:\ drive or server drive where your Prelude data is stored and look for a folder called ‘Automation’. If it isn’t there you will need to create it – see below. If it is there check the contents of the folder to see if it matches the details below. If it does there will be another issue which will need to be reported to Prelude Software – see Support Tickets.

Creating the automation folders: on Your C:\ drive or server drive you should see a folder called ProgramData and within that a folder called Prelude or Diamond Discovery – open this to show somthing like this:

In this image the folder is there – if not there click on ‘New folder‘ and type the name in.

Open the new folder (double click on it) and create two new folders – ftp and logs

Then open the ftp folder and create two more folders – pending and processed

Now go back to the VAT Form and try again

Occasionally, invoices are received for which there is no cost, only VAT – e.g. for insurance or asset finance arrangements.

These can be posted in the usual way, simply by entering the same value for the Gross amount and the VAT amount, both being the amount of the supplier invoice.

Depending on the software parameters, you might have to take care to enter or override some default pre-populated values, e.g. VAT amount, Nett amount, VAT code and Nominal Analysis code, and acccept warnings about the entered VAT amount being different from the calculated VAT amount.

1. Enter the total invoice amount into the Gross and the VAT amount boxes.
   1. This is the VAT amount of the VAT-only invoice.
2. The software will display a calculated VAT amount as if the invoice was a standard VAT invoice, but ignore/override this.
3. Click OK to go to the Details page.
4. There is no Nett amount, so enter 0.00 in the Amount box and ensure VC and Analysis boxes are populated with suitable codes.
   1. Usually VC = 1
   2. Choose any Analysis code – it doesn’t matter as the Nett analysis is 0.00.
   3. Enter a Comment.
5. Click OK to post the invoice.

If you have employees who run a company car and use it for private purposes you can claim back the VAT on all the fuel but you need to adjust the VAT to cover the private element.

Before you start
Check your CO2 emissions figure – it may be on your log book (V5C). If it isn’t click here to try the DVLA.

To find the scale fuel charge for each car: http://www.gov.uk/fuel-scale-charge

Calculate the fuel scale charge for each car for each VAT return period.

Create a nominal journal – Dr. – VAT account
Cr. – Fuel Account

When asked whether Input or Output tax – select Output. This will put the VAT amount into Box 1 which is correct.

Mileage records do not need to be kept but make a note of car reg no and the CO2 figure on the journal.

see Create a Nominal Journal.