Which VAT Code Should I Use In Xero?
Are you a newly VAT registered business? Even if you’re not a newbie to VAT, it can be confusing when dealing with your business purchases.
One question that we frequently get asked is: “which VAT code should I use in Xero?” Getting this right is important so that your ducks are in a row when it is time to submit your quarterly VAT return.
Here’s our Xero VAT code cheat sheet for your purchases to avoid those VAT-induced headaches.
20% (VAT on expenses)
So this one’s easy - most sales of goods and services in the UK are subject to VAT at the standard rate of 20%. Use this code for the bulk of your business expenses where you have been charged VAT and have a valid VAT invoice to reclaim the VAT.
5% (VAT on expenses)
This is reduced rate VAT. This applies to goods and services like domestic fuel and heating.
Now this is where things get tricky…
Exempt Expenses
This means that no VAT was charged. Common exempt business expenses include postage, insurance and some professional membership subscriptions.
Whilst VAT will not be reclaimed as it was not charged, it does need to appear on your VAT return (Box 7) so that is why it should be correctly categorised as Exempt (and not “No VAT” as below)
Zero-Rated Expenses
Zero rated means that the purchases are VAT-able but the rate of VAT is actually 0%.
Examples are domestic travel (think train, bus and TfL), books/magazines and most food & drink (but beware there are quite a few exceptions such as dining-in food and alcoholic drinks to name a few).
Zero-rated purchases do need to appear on your VAT return even though you paid 0% VAT so won’t have anything to reclaim.
No VAT
This code is for “Out-of-Scope VAT” which basically means VAT doesn’t apply at all and falls outside of the UK VAT system. Use this for salaries, payments to HMRC, dividends to directors and NI/PAYE contributions.
There won’t be any VAT to reclaim and purchases using this code won’t appear at all on your VAT return.
Reverse Charge Expenses (20%)
This one tends to cause confusion!
If your business purchases services from outside the UK then it will need to apply what is known as the “reverse charge”.
The supplier does not charge VAT but as the customer you account for it as both a sale and a purchase on your VAT return. You are effectively charging yourself VAT and claiming back. This generally has a nil effect on your VAT return. (The exception is if you're partially exempt business for VAT purposes - speak to your accountant).
You may find you commonly use this code for software advertising services such as Google ads and Facebook ads which are based in Dublin.
EC Acquisitions
This code is no longer used for businesses based in the UK post-Brexit as box 8 and 9 on the VAT return don’t need to be completed anymore unless your business is based in Northern Ireland.
Top Tips:
What about Non-VAT registered suppliers?
We suggest putting them in Zero-Rated so that it pulls through to the correct boxes in your VAT return. We like setting up a separate custom code in Xero called “Non-VAT registered supplier” for clients so it’s easier for them.What about expenses where I cannot claim VAT such as business entertaining?
We would also log these as Zero-Rated expenses. No input VAT will be reclaimed but it will still show up in the correct boxes in the VAT return. Again, for clients we set up a custom code called “Irrecoverable VAT” for simplicity.
There are lots of anomalies in VAT which is what makes it complicated. You can always check the HMRC website or ask your accountant if you're not sure.
We specialise in supporting VAT-registered limited companies - we’d love to speak to you about your business, please get in touch to book in a discovery call to see how we could help.
Disclaimer: The information contained in this blog is intended solely for general informational purposes only and is not intended as a substitute for professional advice. While we have made every attempt to ensure that the information contained in this blog is correct, we are not responsible for any errors or omissions, or for the results obtained from the use of this information. Before making any decision or taking any action, you should consult a professional adviser.
