Here is a simplified guide on which VAT rate to use when adding expenses on your bookkeeping software.
For a more detailed guide on VAT rates, please see HMRC's website, VAT rates on different goods and services.
VAT Receipt
To claim VAT you must be able to provide a VAT receipt which has a 9 digit UK VAT number on it - this will be in the following format:
VAT number: GB123456789 OR 123456789
You can check to make sure a VAT number is valid by using the following link: www.gov.uk/check-uk-vat-number
If a VAT number starts with 2 letters that are not GB then VAT cannot be claimed.
Always check the invoice to see if the supplier has charged VAT or not as if they are not VAT registered there will be no VAT number and no VAT to reclaim.
20% Standard Rate
FreeAgent: 20%
Xero: 20% (VAT on Expenses)
Quickbooks: 20% S (20%)
If the supplier is VAT registered they will usually charge standard rate VAT - they are included in box 4 & 7 of your VAT return. Examples include:
Materials & tools
Computers
Telephone
Printing & stationery
Advertising
Fuel
Car repair & service
Accountancy fees
5% Reduced Rate
FreeAgent: 5%
Xero: 5% (VAT on Expenses)
Quickbooks: 5.0% R (5%)
Reduced rate means that the goods are still VATable but the rate of VAT is 5% - they are included in box 4 & 7 of your VAT return. Examples include:
Power (i.e. gas & electric) for domestic use
Renovating a dwelling that has been empty for at least 2 years
Zero Rate
FreeAgent: 0%
Xero: Zero Rated Expenses
Quickbooks: 0.0% Z
Zero-rated means that the goods are still VATable but the rate of VAT is 0% - they are included in box 7 of your VAT return. Examples include:
Public transportation (train, bus, flights)
Books & newspapers
Brochures, leaflets & pamphlets
Water supplied to households
Construction and sale of a new residential building
Food essentials (milk, tea, bread)
Energy-saving materials permanently installed in dwellings and buildings (e.g. energy saving boilers)
Exempt
FreeAgent: Exempt
Xero: Exempt Expenses
Quickbooks: Exempt
Exempt goods or services are expenses where no VAT is charged on the supply. Exempt expenses would still be included in box 7 of your VAT return. Examples include:
Insurance
Postage stamps
Bank charges
Health services provided by doctors
Business/client entertainment
Supplies from UK businesses that are not VAT registered
Goods or services with no receipt provided
Outside the Scope of VAT
FreeAgent: Out of Scope
Xero: No VAT
Quickbooks: No VAT (0%)
These are expenses that are left off your VAT return completely and do not show in box 4 or 7. Examples include:
Wages & salaries
Pensions
Taxes paid to HMRC (PAYE, VAT, CIS, Corporation Tax)
Dividends
Loan repayments
Business rates
Charitable donations
Domestic Reverse Charge (CIS)
FreeAgent: Contact Us
Xero: Contact Us
Quickbooks: Contact Us
Domestic reverse charge applies where two businesses are VAT registered and are trading within the construction industry scheme(CIS). Details of domestic reverse charge can be found here.
Reverse Charge (Foreign)
FreeAgent: Reverse Charge (Need to enable non-standard VAT rates in settings)
Xero: Reverse Charge Expenses (20%)
Quickbooks: 20.0% RC (0%)
Some suppliers of services are based outside the UK. For many of these services, the suppliers don’t register for VAT in the UK and so don’t charge VAT. Instead, you as the customer have to apply the reverse charge rules. Receipts or invoices received may have a note on them along the lines of “This supply has been made under the reverse charge scheme”.
For more information, click here.