Keep VAT records

Applies to:     Office Accounting Express, Office Accounting Professional

All VAT registered companies must keep records of all their business transactions to account for VAT to HM Revenue & Customs. Microsoft Office Accounting 2008 helps you with this task.

Input VAT

When purchasing products and services, you must record the net price as well as the input VAT. For example, consider the following purchase invoice.

keep vat records

Sample purchase invoice

The sample purchase invoice has a number of products and services listed, including an expense. Each line has a VAT code. The net amount is £224.50 and the VAT is £27.25. To see the VAT totals for each VAT code, on the toolbar, click VAT Totals.

keep vat records

VAT totals for purchase invoice

The VAT Totals dialog box sums the VAT for each VAT code on the purchase invoice. To close the VAT Totals dialog box, click OK.

The following figure shows the purchase invoice postings.

keep vat records

Purchase invoice postings

The postings are as follows:

  • The purchase ledger is credited for the total invoice amount (the net amount of each line as well as the VAT for each line).

  • The Purchase/Input VAT account is debited for the VAT on each line.

  • The individual expense accounts are debited for the net amounts on the lines.

Office Accounting 2008 keeps track of the net and VAT amounts of each supply for VAT filing purposes.

VAT-inclusive purchases

Some expenses and purchases are provided with a retail price that is inclusive of VAT. Examples are train tickets, parking expenses or anything normally sold to individual consumers.

Accounting 2008 makes it easy to record these expenses. On the Purchase Invoice form, select the Show prices with VAT check box and the VAT is calculated based on the fraction of the total gross amount instead of the net amount.

Output VAT

Similar to input VAT, Accounting 2008 keeps track of output VAT on all sales transactions. For example, consider the following sales invoice.

keep vat records

Sample sales invoice

The sales invoice is similar to the purchase invoice. (Note that the Invoice form toolbar has a VAT Totals button.) The sales invoice is different because its postings pertain to the sales ledger and output VAT.

The VAT totals are also displayed on the printed invoice and always in pounds sterling (GBP), regardless of the currency of the invoice (as directed by HM Revenue & Customs).

The postings are as follows:

  • The sales ledger is debited for the total invoice amount (the net amount of each line as well as the VAT for each line).

  • The VAT on the Sales account is credited for the VAT on each line.

  • The Sales account is credited for the net amount.

In Office Accounting Professional and Office Accounting Professional Plus, if the invoice contains stock items as shown in the preceding figure, the invoice also:

  • Credits the Cost of Sales account with the cost of the item.

  • Debits the Stock Asset Account with the cost of the item.

keep vat records

Sales invoice postings

Similar to purchases, Accounting 2008 keeps track of the net and VAT amounts for each supply on the invoice for VAT filing purposes.

Change the VAT code

You can always change the VAT code or VAT amount on the individual lines of a purchase invoice or sales invoice. To do this, edit the VAT code and amount directly on the invoice before saving it.

VAT lines

In rare occurrences, you may need to charge or pay VAT separately from any products or services supplied. With Accounting 2008, you can add VAT lines to sales invoices and purchase invoices. In VAT lines, you can specify the VAT code and VAT amount.

Select a VAT line as the line type in the Products and services section of the Invoice form or the Purchases section of the Purchase Invoice form and specify the VAT code and amount.

keep vat records

Specifying a VAT line

VAT and early payment discounts

VAT legislation specifies that VAT should be calculated on the amount net of any discount offered, regardless of whether the customer takes the discount.

This means that the tax value of goods and services equals the value of goods and services less any cash discount.

Early payment discounts are thus treated as regular discounts.

Example

A U.K. business sells goods to a customer for £1,000 plus VAT subject to a 5 percent discount for early payment. The VAT is calculated on the amount net of the discount:

£1,175 – (5% * £1,175) = £1,116.25
Output tax: £1,116.25 * 7/47 = £166.25

The following figure shows how Accounting 2008 would show the preceding example.

keep vat records

Invoice with early payment discount

The discount is given on the VAT, regardless of whether the customer pays early. The rule applies to early payment discounts for both sales and purchases.

VAT and carriage

Because services marked as carriage aren't subject to early payment discount, the VAT for the carriage on an invoice isn't discounted.

keep vat records

Invoice with early payment discount and carriage

The preceding figure shows the early payment discount doesn't apply to the carriage item, and thus it contains the full VAT amount.

VAT-inclusive customer prepayments

In many industries, it is common to request full or partial payment from customers before sending them a product or commencing work. According to HM Revenue & Customs regulations, output VAT must be paid upon receiving these prepayments, even when using the accrual accounting scheme. Accounting 2008 handles this by offering the ability to create a VAT-inclusive prepayment.

keep vat records

VAT-inclusive prepayment

To create a VAT-inclusive prepayment, select the This is a VAT-inclusive pre-payment check box and specify the VAT code. Accounting 2008 calculates the VAT fraction (in the preceding example: £500*17.5/117.5 = £74.47), and the prepayment shows on the next VAT return as part of the output tax. When the prepayment is settled with an invoice, the VAT return reflects the actual VAT amount on the invoice.

The VAT amount on the prepayment is thus a temporary VAT until the final VAT amount is known for the invoice.

VAT-inclusive supplier prepayments

Some of your suppliers may request full or partial payment before sending a product or commencing work. This payment may include VAT. In Accounting 2008, you can create a VAT-inclusive prepayment.

keep vat records

VAT-inclusive prepayment

To create a VAT-inclusive prepayment, select the This is VAT inclusive check box and specify the VAT code. Accounting 2008 calculates the VAT fraction (in the preceding example: £347*17.5/117.5 = £51.68), and the prepayment shows on the next VAT return. When the prepayment is settled with a purchase invoice, the VAT return reflects the actual VAT amount on the purchase invoice.

We recommend that you always request an actual VAT invoice from your supplier detailing the payment and VAT amounts to avoid issues when audited by HM Revenue & Customs inspectors.

EU exempt sales

Sales to customers in other member states of the European Union are governed by the rules of the Single European Market. Transactions between members of the EU are not regarded as imports and exports, but rather acquisitions of goods from, and supplies of goods to, other member states.

Supply of goods to other EU member states is normally zero rated, provided that the following conditions are met:

  • Both parties are VAT registered.

  • All the goods leave the country.

The customer has to pay VAT on entry but can recover the tax as input tax. This is also known as the destination system, because VAT is paid in the customer's country. Where the customer is not VAT registered, the selling company charges regular U.K. VAT rates. This is known as the origin system because tax is due in the originating country.

Accounting 2008 handles sales to customers registered for VAT in other EU member countries. You need to make the customer EU VAT exempt, provide the customer's foreign VAT registration number and set the VAT code to E (EU VAT exempt).

keep vat records

EU VAT exempt customer

The preceding figure shows the Details tab of a Customer form. The form shows the customer has a nine-digit Belgian VAT registration number and a Customer VAT code of E. It also shows that the EU VAT Exempt Customer check box is selected.

When an invoice is created for this customer, the VAT information contained in the Customer form is transferred to the Invoice form as shown in the following figure.

keep vat records

Invoice with VAT information transferred from Customer form

The VAT code is E, the VAT is £0.00 and the invoice has the EU VAT Exempt Customer check box selected. There are no VAT postings, as shown in the following figure. Note that postings are shown in pounds sterling (GBP).

keep vat records

Sales invoice postings

EU VAT exempt invoices show on the VAT 100 Liability report line 8 (Total value of supplies of goods and related services, excluding any VAT, to other EC Member States) and on the VAT return as well as on the EC Sales List report.

EU exempt acquisitions (purchases)

Acquisitions of goods (purchases) from other EU member states are liable for VAT in the U.K., provided that both parties are VAT registered. The company is liable for VAT on entry, but the VAT can be reclaimed as input tax. If the U.K. company (your company) is not VAT registered, the VAT is imposed in the country of origin.

Accounting 2008 handles this in a similar way as EU VAT exempt sales, although the resulting postings differ.

keep vat records

EU VAT exempt supplier

For EU exempt acquisitions, you need to make the supplier EU VAT exempt and provide the supplier's foreign VAT registration number. The VAT code should be left blank because the VAT code is determined by the products or services supplied.

The supplier in the preceding figure has an eleven-digit French VAT registration number and has been marked as an EU VAT exempt supplier.

The following figure shows a sample invoice that is received from the supplier.

keep vat records

EU VAT exempt purchase invoice

The purchase invoice obtains the VAT code from the product supplied. In this case, VAT Code shows R (reduced). The purchase invoice also has the EU VAT Exempt Supplier check box selected.

Even though the invoice from the supplier doesn't contain VAT, it must still be reported to HM Revenue & Customs. This is done via the postings.

keep vat records

In the preceding figure, the purchase invoice contains both input and output tax postings at the reduced VAT rate of 5 percent.

EU VAT exempt acquisitions show on the VAT 100 Liability report line 9 (Total value of all acquisitions of goods and related services, excluding any VAT from other EC Member States) and the VAT return.

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