Have you ever got afraid while entering your details in your accounting software before pressing the button for generating a VAT return, before coming across a report which is completely wrong? Where have all the sales go? Why aren’t some of the purchases mentioned? In case you are faced with such a situation, it is because you have utilized the wrong VAT rates.
Why doesn’t your accounting software deal with the problem?
One major advantage of using Excel is that you only need to focus on whether something is incurring VAT or not. But, accounting software like Xero or FreeAgent will make it necessary for you to complete all your VAT returns correctly. Xero will try to assist you by auto-selecting specific VAT rates for some expense codes, such as example insurance shall always default to exempt. However, because of the presence of different types of suppliers and services, these default codes might be wrong. Therefore, it is always wise to double-check.
Is It Important What VAT Rates You Use? Something Certainly Has VAT On Or It Doesn’t
From the standpoint of the due VAT, this is correct. Choosing exempt over zero rated won’t alter the amount you will have to pay to the HMRC as VAT. However, it will have an impact on the details which you send to the HMRC when you submit your VAT return. As part of its internal checks, HMRC shall compare the sales declared in your VAT Returns with the figures submitted in accounts.
Therefore, any sort of discrepancies could be identified and lead to an investigation.
- You may feel highly annoyed if your VAT payments are correct.
- Consult a company which offers VAT filing services to advice you about existing VAT rates and when you should utilize them.
- You will be able to avoid getting a wrong report since tax consultants have a clear idea about the different VAT rates which are existing within the UK at present.
Details of the existing VAT rates are mentioned below:
No VAT is pretty simple. This is meant for buying anything for which VAT is not applicable. Therefore, you don’t need to declare your VAT returns. It is applicable for items like wages, bank transfers, dividends, and tax payments.
Standard Rate-20% VAT
All your suppliers who will charge a standard rate will provide you an invoice or receipt which will show the amount of VAT deducted. Standard rates will cover any transaction unless it falls under any other category. However, you will find that most of your purchases are standard rated.
There are a number of purchases which you might make for which a reduced VAT rate is applicable. For the majority of businesses, it covers light and heating bills.
Zero rated sales and purchases include those which have VAT at a rate of 0%. So, they are not VAT free and this is the major reason why such transactions need to be included in your VAT Return. From the day to day expenses point of view, zero rate expenses comprise train travel, books and newspapers, children’s apparels and shoes & flights. However, if you sell goods outside the UK, you will have a zero rate of VAT if you export goods to non-EU countries and goods supplied to VAT registered EU businesses. In case you sell something to a non-VAT registered EU business or to a general member from the public, it will be standard rated.
Transactions that are exempted from VAT assistance are the ones on which you think there is VAT but have been removed from the system. Because of this reason, as in the case of No VAT items, they don’t need to be shown on your VAT Return. Some examples of exempt expenses include insurance, finance and credit charges, royal mail postage and subscriptions to a membership organisation.
Therefore, if you find yourself with an unfinished VAR Return after you have entered all your details, it may be wise to take a look at the VAT rates. There are chances that missing transactions will be hidden among the No VAT and exempt entries.