Microsoft Office Accounting Professional 2008

Keeping VAT Records

All VAT registered companies must keep records of all their business transactions in order to account for VAT to HM Revenue and Customs. Fortunately, this is something Office Accounting does for you.

Input VAT

When purchasing products and services, you must record the net price as well as the input VAT. Let us look at a purchase invoice as an example:

Sample purchase invoice

The sample purchase invoice above has a number of products and services on it, including an expense. All lines have a VAT code each. The net amount is £224.50 and the VAT is £27.25. To see the VAT totals for each VAT code, click on the VAT totals button in the toolbar.

VAT totals for purchase invoice

The VAT Totals dialog sums up the VAT for each VAT code on the purchase invoice.

The postings of the purchase invoice looks as follows:

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.

As you can see, Office Accounting 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 – this could be train tickets or parking expenses or anything normally sold to individual consumers.

Office Accounting makes it easy to record these expenses. Just check the Show prices with VAT checkbox and the VAT will be calculated based on the fraction of the total gross amount instead of the net amount.

Output VAT

Similar to input VAT, Office Accounting keeps track of output VAT on all sales transactions. Let us look at an example of a sales invoice:

Sample sales invoice

The sales invoice is similar to the purchase invoice (including the VAT Totals button) except the postings pertain to the sales ledger and output VAT.

The VAT totals are also displayed on the printed invoice and always in Sterling, regardless of the currency of the invoice (as directed by HM Revenue and 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 Sales account is credited for the VAT on each line.
• The sales account is credited for the net amount.

If the invoice contains stock items (Office Accounting Professional and Professional Plus) as above, the invoice will also:

• Credit the cost of sales account with the cost of the item
• Debit the stock asset account with the cost of the item

Sales invoice postings

As with the purchases, Office Accounting keeps track of the net and VAT amounts for each supply on the invoice for VAT filing purposes.

Changing the VAT Code

As mentioned above, you can always change the VAT code or VAT amount on the individual lines of a purchase or sales invoice. Simply edit the code and amount directly on the invoice before saving it.

VAT Lines

In rare occurrences you need to charge or pay VAT separate from any products or services supplied. Office Accounting allows you to add VAT lines to sales and purchase invoices. The VAT line allows you to add a VAT line where you specify the VAT code and the VAT amount.

Simply select a VAT line as the line type in the products and services grid and specify VAT code and amount.

Specifying a VAT line

VAT and Early Payment Discounts

VAT legislation specifies that the value added tax should be calculated on the amount net of any discount offered, whether or not the customer takes it, thus:

Tax value of goods and services = value of goods and services less cash discount

Early payment discounts are thus treated as regular discounts.

Example

A UK business sells goods to a customer for £1,000 plus VAT subject to a 5% 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 example above would look as follows in Office Accounting:

Invoice with early payment discount

The discount is thus given on the VAT, regardless of whether the customer pays early or not. The rule applies to early payment discounts for both sales and purchases.

VAT and Carriage

Since services marked as carriage aren’t subject to early payment discount, the VAT for the carriage on an invoice isn’t discounted either:

Invoice with early payment discount and carriage

As you can see above the early payment discount doesn’t apply to the carriage item and thus it contains the full VAT amount.

VAT-inclusive Customer Prepayments

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

VAT-inclusive Prepayment

To create a VAT-inclusive prepayment, simply check the This is a VAT-inclusive prepayment checkbox and specify the VAT code. Office Accounting will then calculate the VAT fraction (in the example above £500*17.5/117.5 = £74.47) and the prepayment will then show up on the next VAT return as part of the output tax. When the prepayment is settled with an invoice, the VAT return will reflect 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 on the invoice.

VAT-inclusive Supplier Prepayments

Some of your suppliers may request full or partial payment up-front before sending a product or commencing work. This payment may include VAT. Office Accounting offers the ability to create a VAT-inclusive prepayment.

VAT-inclusive Prepayment

To create a VAT-inclusive prepayment, simply check the This is VAT-inclusive checkbox and specify the VAT code. Office Accounting will then calculate the VAT fraction (in the example above £347*17.5/117.5 = £51.68) and the prepayment will then show up on the next VAT return. When the prepayment is settled with a purchase invoice, the VAT return will reflect the actual VAT amount on the purchase invoice.

It is always recommended to request an actual VAT invoice from your supplier detailing the payment and VAT amounts in order to avoid issues when audited by HM Revenue and Customs inspectors.

EU Exempt Sales

Sales to customers in other member states of the European Union are governed by the rules on 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, as VAT is paid in the customer’s country. Where the customer is not VAT registered, the selling company charges regular UK VAT rates. This is known as the origin system as tax is due in the originating country.

Office Accounting handles sales to customers registered for VAT in other EU member countries for you. All you need to do is to make the customer as EU VAT exempt, provide the customer’s foreign VAT registration number and set the VAT code to E (EU VAT exempt).

EU VAT exempt customer

The customer above has a nine-digit Belgian VAT registration number, a customer VAT code of E and has been marked as an EU VAT exempt customer.

When an invoice is made to the customer, it looks as follows:

The VAT code is E, the VAT is £0.00 and the invoice has the EU VAT exempt customer checkbox checked. There are no VAT postings as you can see below (postings shown in Sterling).

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

EU Exempt Acquisitions (Purchases)

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

Offie Accounting handles this is a similar fashion as EU VAT exempt sales, although the resulting postings differ.

EU VAT exempt supplier

All you need to do is to make the supplier as EU VAT exempt and provide the supplier’s foreign VAT registration number. The VAT code should be left blank as the VAT code will be determined by the products or services supplied.

The supplier above has an eleven-digit French VAT registration number and has been marked as an EU VAT exempt supplier.

When an invoice is received from the supplier, it looks as follows:

EU VAT exempt purchase invoice

The purchase invoice will pick up the VAT code from the product supplied, in this case the R (reduced). It will also have the EU VAT Exempt Suppliercheckbox checked.

Even though the invoice from the supplier doesn’t contain VAT, it must still be reported to HM Revenue and Customs. This will be done via the postings:

As you can see, the purchase invoice contains both input and output tax postings at the reduced VAT rate of 5%.

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