The Difference between Zero-Rated VAT, VAT Exempt & Out of Scope of VAT

There is sometimes confusion over what the difference between Zero-Rate VAT, VAT Exempt & Out of Scope VAT. Zero-Rate VAT items, such as books, childrens clothes and some food, do have VAT on them, it’s just at zero percent, so the actual VAT is nil. (In Sage, the VAT code to use would be T0). However, the net purchase cost of zero-rate items still goes in Box 7 of a VAT Return. Suppliers of zero-rated goods/services can still reclaim all their input VAT (the VAT on their own purchases) VAT Exempt items, such as postage stamps, do not have VAT on them (not even at 0%). The VAT is nil. (In Sage, the VAT code to use would be T2). However, the net purchase cost of VAT Exempt items still goes in Box 7 of a VAT Return. Suppliers of Exempt goods cannot reclaim the input VAT (the VAT on their own purchases) relating to Exempt Supplies. Out of Scope items would be those purchases made from unregistered businesses and private individuals. (In Sage, the VAT Code would be T9). These purchases do not appear at all in the VAT Return (Clearly, there was no VAT charged, but also, as they are completely outside the VAT system, the cost should not appear in Box 7 of the VAT Return either) Out of Scope & VAT Codes in Sage There is some confusion, even in accounting circles (as demonstrated on Accounting Web), regarding how to deal with Out of Scope items. Some suggest that the T0 or T1 Sage code be used for these transactions (and manually overriding the automatically calculated VAT figure, in the case of the T1 code). This is incorrect. Even though the goods/services might ordinarily be VATable, until the supplier is VAT Registered, it’s out of scope. A side effect of erroneously including these transactions in the VAT Return, is that Box 7 would be artificially high. This may not be significant amount, but be warned that HMRC do carry out statistical checks to ensure that Box 1 & 6 and Box 4 and 7 do correlate to each other.

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