VAT - Setting up and Configuration
If your Organisation is registered for VAT then the system will handle all of your VAT transactions and produce VAT reports. You can also file your VAT100 and VAT101 (ECSL List) returns online through the Government gateway to HM Revenue and Customs (HMRC).
The topics covered in this guide are: -
- The principles of VAT
- VAT Schemes
- Setting up for Recording VAT
- VAT Configuration
- Flat Rate Configuration
- VAT Codes (Rates of VAT)
- Transition from one VAT scheme to another
The principles of VAT
On sales to your customers (supplies) you charge and collect VAT, known as OUTPUT TAX. You deduct the VAT you have been charged by your suppliers (acquisitions), known as INPUT TAX. You pay to or receive from HM Revenue and Customs the difference. HMRC publish a basic guide to VAT VAT Notice 700: the VAT Guide
Unfortunately the actual operation of VAT is more complex. Businesses are obliged to cope with multiple rates of VAT, exempt supplies, rules for trading with European Union as well as other imports and exports. VAT on certain types of business expenses cannot be recovered as input tax. The system will deal with all of these issues provided you make a little effort to set up and follow the processes accurately. As well as the standard VAT scheme, HMRC allow some special schemes i.e.
- Cash Basis Scheme - see VAT Notice 731: cash accounting
- Flat Rate Scheme - see VAT Notice 733: flat rate scheme
- Flat Rate Scheme cash based turnover - see VAT Notice 733: flat rate scheme
- Annual Scheme - see VAT Notice 732: annual accounting
The system will deal with these schemes.
To users unused to it, the language of VAT can be confusing and so we strongly recommend that if you are uncertain about any aspect of VAT recording and reporting you should seek appropriate advice from your advisors.
The use of online filing of VAT returns is efficient and saves time, it can also reduce the possibility of errors, and we commend it to you. It is quick and easy to set up.
In the standard scheme VAT is accounted at the tax point date shown on invoices raised or received. The Cash Accounting Scheme allows you to account for VAT on the basis of cash amounts actually received or paid out. Certain conditions must be fulfilled before you can use the cash accounting scheme, please check with your advisor before selecting this option.
Annual Accounting is aimed at smaller business entities, the scheme works by allowing one return each year. A number of interim payments (usually nine) are made during the ]year and a balancing payment made when the annual VAT return is made within two months of the end of the accounting year.
The Flat rate Scheme offers another option. Under the normal VAT rules the details of the VAT and the net value have to be recorded for each sale and purchase transaction. For the flat rate scheme however it is not necessary to record the individual VAT details, but simply accumulate the value of all VAT inclusive sales (supplies), including any zero and exempt rated supplies, and apply a flat rate percentage to the total in each VAT period. No separate claim for input VAT (VAT on purchases) is allowed or necessary. The scheme is only open to business whose annual taxable turnover does not exceed certain limits. (Please check with your advisor) In essence there are two versions of this scheme. The first is based upon the VAT inclusive turnover calculated as invoices are raised (the accruals principle of the standard VAT scheme). The second is based upon a cash basis i.e. when invoices are actually paid, equivalent to the Cash VAT scheme.
Setting up for Recording VAT
If you are registered for VAT then the system will need to be set to track VAT. This is done in the Profile screen. Having done this a VAT configuration screen allows the user to configure VAT appropriate to the business requirements. We suggest you have to hand the following pieces of information and knowledge of the VAT scheme you are using:
- VAT Registration Number
- The number given by HMRC on registration, it should appear on all your business invoices and will do so on system produced invoices when entered here. This number is shown on the certificate of registration.
- Date of registration
- The date of VAT registration confirmed on the certificate of registration issued by HMRC.
- The postcode of the registration address, the business postcode that appears on the VAT registration certificate or has been formally amended to HMRC records.
- VAT Scheme:
- Choose either the Standard Scheme, or the Cash Accounting Scheme (see notes above)
- VAT Accounting Period:
- Usually VAT is accounted for on a quarterly basis however you can account on an annual or monthly basis. If you are not sure as to your VAT accounting periods confirm with your advisor.
- Next VAT Period End Date:
- The date of the last day of your open VAT accounting period. This date needs to be set initially by the user. Subsequently, the process of accepting a VAT return will automatically roll the date forward as appropriate for either quarterly or annual schemes.
Once you have the above information, VAT Accounting is activated from the Organisation Profile
Control - Organisation Profile - Accounting Options Tab
Tick the Track VAT box and then SUBMIT to activate VAT accounting.
Messages and warnings will appear requesting the user to complete the VAT configuration.
The next stage is to configure VAT to operate as required by the business. This is done in the Configure VAT screen.
HMRC - Configure VAT
A configuration screen is presented.
The details of your VAT registration number go in the VAT Number field The two-character alphanumeric country code prefix (GB for the UK) is required to appear on sales invoices issued with zero rated supplies to vat registered customers in EU member states. To ensure this happens prefix the VAT number with the code.
Note that the validity of a VAT number is checked by the system against HMRC validity algorithms.
Also enter the Registration Date. The Final Return (De-registration Date) will only be entered if it is indeed the final return for the business. See the de-registration section below.
If you would like to use the Government Gateway to file your VAT100 and ECSL(VAT101) online directly from the system click the Use Online VAT Filing box. With online filing is a requirement to use electronic payment, if you would like the system to automatically post the cash payment (or receipt) select the relevant bank account for the posting from the AutoPost Direct Debit drop down box.
If you are using the flat rate scheme click the Flat Rate VAT box, note that if you are using the flat rate cash based turnover method, please be sure that Cash accounting scheme is also selected in the VAT Scheme box.
Select from the drop down box the VAT Scheme operated, either standard or cash. The next two fields require details of the VAT Periods that apply for reporting and the Next VAT Period End Date that will apply as you start to use the system. Note that period end dates are usually at a month end, but it is possible to have a mid month such as the 5th, just enter the date as normal. Note that dates of the 28 to 31st will at the next VAT period default to the calendar month end.
If you are UK VAT registered trader that supplies goods, or a trader that supplies services that would be accounted for by a registered trader in another EU member state using the reverse charge mechanism, then a quarterly (or monthly) EC sales list (VAT101) return is required by HMRC. Select the appropriate ECSL Filing Cycle for the business. The default is quarterly. The filing must take place within 21 days after the calendar quarter end for online filing or 14 days if using paper filing. If the quarterly turnover exceeds a limit (£35k from 1st January 2012) for goods then the ECSL cycle is monthly. Enter the date of the Next ECSL period End. This will only need to be set once, unless the filing cycle is amended. If using quarterly filing this will be 31st March, 30th June, 30th September or 31st December. Monthly filing will require the month end date. Note that the ECSL filing deadlines are not necessarily the same as the VAT 100 deadlines for the business.
If online filing for ECSL is being used the VAT postcode is required. This is the postcode that appeared on the registration documentation, or was subsequently formally amended with HMRC.
Click SUBMIT to save the details.
The recording of VAT transactions starts with immediate effect, including all transactions dated this day.
Flat Rate Configuration
If you have ticked the flat rate scheme box you will be directed to an additional screen allowing for input of flat rate percentages and effectivity dates.
Click ADD ITEM and in the first instance the From Date is the date when HMRC granted permission for the entity to use the flat rate scheme and the To Date is the date when the use of the particular rate changes or the scheme changes to some other. These dates are important for the correct transition between schemes.
Enter the flat rate percentage (In the format xx.xx) to be applied in the Flat Rate box. Note that if the registration date is less than 12 months in the past it is important to enter a record for a discounted rate ending on the day before the first anniversary of VAT registration. A second record it then required with a From Date on the anniversary with the main rate.
Click SUBMITto save the details.
VAT Codes (Rates of VAT)
VAT codes are used to select VAT rates and control how the system deals with VAT transactions. The accurate use of codes ensures that the recording and reporting of VAT is correct.
Current VAT rates are 20%, 5%, or 0%. The correct rate code needs to be selected when a transaction is entered. If/when the Government alters VAT rates; the new ones will be made available from the appropriate dates. Additionally some items are exempt from VAT and the exempt rate will need to be selected. An example of an exempt supply is the purchase of insurance. Details of what rates apply to what are available from HMRC publications and your advisor.
Some special codes exist to deal with particular circumstances and these are discussed below.
If your business trades in the European Union either selling or buying, HMRC have some additional recording and reporting obligations. The key for the system to handling these transactions accurately is that the country of the customer or supplier is set up correctly.
- Average (Avg.)
- This code can be used where the transaction is recording an aggregation of mixed VAT codes in a single line entry with the VAT amount manually set as required. This code will also appear in VAT transactions reports in an entity using the cash basis scheme. This is because there is a possibility that a transaction with mixed vat rates may be partially paid, in which case the vat has to be pro-rated as an average rate.
- Out of Scope
- This VAT code is only used where a transaction is not in the VAT system at all. For example payments into a money purchase pension scheme are Out of Scope because they are equivalent to savings. Payments of salaries or wages are also out of scope as are repayments of director?s loans. Using this code will result in no VAT reporting impact. Use this code in making or receiving actual VAT payment amounts.
- This code is used where there is no VAT on a transaction. This is not the same as zero rated or exempt. The impact in the system is that the value of the purchase is included in the VAT 100 return, but no actual VAT. You would use this for instance if a purchase is made from a non-VAT registered supplier, who would not add any VAT. The purchase value is then picked up in the VAT100 return.
- VAT Only
- This may be used where only the VAT amount is to appear on the VAT return with no purchase or income value associated with it.
There is an obligation to register when the value of your businesses taxable supplies (or distance sales or European Union acquisitions) in the prior 12 months exceed the current threshold. You must notify the HM Revenue and Customs National Registration Service within 30 days from the end of the month that this occurred. Alternatively if you expect your taxable supplies (or EU Acquisitions) in the next 30 days alone to exceed the threshold, you must notify within 30 days of that date. You will have to account for VAT the first day of the second month after you exceeded the registration threshold. We strongly recommend that you consult with your Advisor in deciding your VAT position.
When your VAT registration has been confirmed, you will know the date from which you must account for VAT.
Under certain circumstances de-registration may be allowed or required. In that event a date of cancellation will be notified by HMRC. In the VAT configuration screen enter the date provided by HMRC for de-registration in the Final Return (Deregistration) Date box. The current VAT100 return will now default to this date and all open VAT transactions dated up to and including this date will be included. Finalise the return in the usually way.
If there are any transactions in the system dated after the final return date showing a VAT implication these will need to be amended to remove any VAT. When this is complete return to the Business Profile Accounting Options tab and un-tick the Track VAT box. From now on transaction input screens will not show any VAT reference.
If in the future reports are required from any closed VAT periods simply temporarily switch Track VAT back on to see the VAT menu and VAT reports. Viewing any transactions from the period when VAT was in effect will show the VAT impact as recorded and reported.
Transition from one VAT scheme to another
These are not trivial changes and it is recommended that they be completed with the assistance of your advisor. On the day that the transition is agreed (usually at the beginning of a VAT reporting period), amend the VAT scheme selection box in the VAT tab of the business profile.
HMRC --Configure VAT --VAT Scheme
Try to ensure that all transactions subject to the old scheme are entered in to the system before the change date. On the change date and subsequently, all transactions will be subject to the new scheme. If you subsequently find that a transaction should have been entered prior to the change date, you may have to make manual corrections in preparing your VAT 100 return. It is important that the VAT 100 return immediately after the transition period is thoroughly reviewed, preferably by your advisor, to ensure that the VAT under the new scheme is accurately shown. We suggest that a VAT transaction report under the old scheme is prepared before modifying the scheme. A new VAT transaction report (for the same VAT period) is run immediately after the scheme change. These two reports will assist in the reconciliation process and identifying any necessary manual adjustments.
In the particular circumstances of a transition from Cash to Standard scheme, the Open Invoices and Unpaid Bills Reports can be downloaded as at a specific date into an XLS (Excel) file where the VAT and Gross amounts of the original documents (Invoices, Bills and Credit Notes) and amounts outstanding are given to help in the reconciliation process. Note the PDF report does not show this level of detail.
The following two topics provide more information.