When dealing with VAT it’s important that you are aware of the distinction between 0% and N/A VAT Rates;
- 0% should be used when VAT may not be applicable, but the Net Amount still needs to be recorded with HMRC.
- N/A should be used when a transaction is exempt from VAT Reports entirely. Net Amounts will not be included in any VAT Report.
CLASSIFYING YOUR TRANSACTIONS:
- Zero rated goods – Set VAT Rate to 0% so there is no VAT charge. However you still must show this VAT information on your Invoices, so the Net Amount is included in your VAT Return.
Eg: trains & tubes, some food, scheduled flights
- Exempt goods – Set VAT Rate to N/A so there’s no charge. Transactions will not be included in your VAT return. Eg: postal supplies provided by the post office (eg. you buying stamps), Insurance, Financial Services/bank charges.
This article from HMRC will provide further clarification on handle VAT Exempt goods and goods outside the scope of VAT: http://www.hmrc.gov.uk/vat/forms-rates/rates/rates.htm
ADJUSTING THE DEFAULT RATES:
You can adjust the default VAT rates by going to Settings > VAT Settings > Default VAT Rate. You can configure the default VAT rate on an individual Sales Code (Invoices > Sales Codes) or Purchase Code (Purchases > Purchase Codes). The rate set here will override the one specified within Settings > VAT Settings.
These notes should be used in conjunction with advice from your accountant as there are other aspects to be taken into consideration such as the annual adjustment and monthly threshold.