Setting up VAT in Office Accounting
Applies to : Office Accounting Express, Professional

When you create a new company, you are asked about VAT in the setup wizard:

Select VAT preferences

Select Yes and click Next.

Select VAT preferences (Continued)

Provide your VAT registration number (9 digits in the UK), your VAT reporting period as well as if you use the cash or the accrual accounting scheme for VAT as directed by your official registration with HM Revenue and Customs. You can choose between monthly, bimonthly, quarterly and annual VAT accounting schemes. Click Next and complete the setup of your company.

VAT Preferences
If you did not set up your VAT preferences when you were setting up your company, you can set it up using the VAT tab in Preferences on the Company menu.

VAT tab in Company preferences

Make sure the Track VAT checkbox is checked and record your nine digit VAT registration number from HM Revenue and Customs. Office Accounting will automatically set up HM Revenue and Customs as a supplier.

Make sure your VAT reporting period, ending period and accounting scheme (accrual or cash) is correct and click OK. You can change between the schemes and periods later if need be.

The two VAT accounting schemes and VAT codes are explained in the following sections.

Accrual and Cash Accounting Schemes for VAT
Some small businesses with an annual revenue below a certain limit (£600,000) may report VAT using the cash accounting scheme even though they use the accrual accounting scheme to keep the rest of their accounting records.

In the cash accounting scheme, the tax point for input and output tax is the later of the date of the invoice or the date the payment was received.

The main advantage of the cash accounting scheme for VAT is that it improves cash flow where customers are slow to pay and VAT does not have to be paid on bad debt customers.

Note that the cash accounting scheme only governs when VAT is reported, not what is reported (except for bad debt).

The other method is called accrual accounting scheme for VAT, where you are liable to pay your VAT after it has been invoiced, regardless of whether your customers have paid the invoices or not.

The small businesses who qualify for the cash accounting scheme may also elect to report VAT on account using the accrual accounting scheme, where VAT payments can be made on account during the year and VAT returns only filed once per year. This reduces the amount of administration.

Office Accounting handles both the cash and accrual schemes as well as allowing you to make payments on account between the filing of VAT returns. Unlike most other accounting software, Office Accounting also allows switching between schemes. If you company grows beyond the cash accounting scheme, you can switch scheme in company preferences, and the subsequent return will be calculated on accrual basis (or vice versa).

The HM Revenue and Customs VAT Agency
VAT is collected on behalf of the British government, represented by HM Revenue and Customs. Office Accounting automatically sets up HMRC as the VAT agency when setting up a new company:

The HMRC VAT Agency in Office Accounting

HM Revenue and Customs is a special supplier, only used for VAT reporting (a separate HM Revenue and Customs supplier is set up for payroll taxes). As you can see in the header, HM Revenue and Customs – VAT is a VAT Agency rather than a supplier.

Note that it is not possible to set up multiple VAT agencies if your company is registered for VAT outside the UK. This must be handled manually.

HM Revenue and Customs – VAT has details and financial history tabs as well.

HMRC details tab

The details tab lists the terms, the bank account information (for Bacs payments) and the nominal accounts where the VAT amounts are posted:
  • The VAT Liability Account is used for the net amount owed to HM Revenue and Customs, as the total balance for all VAT returns, VAT payments and VAT refunds. A negative balance means that HM Revenue and Customs owes you money.
  • The Purchase / Input VAT account is used for input tax on all purchases.
  • The VAT on Sales account is used for output tax on all sales.
  • The EC Acquisition VAT account is used for recording output tax for all EU acquisitions.

HMRC financial history tab

The financial history tab lists all the VAT returns that have been created. Form here you can drill down on a VAT return and see the details.

Similar to regular suppliers, you can also add custom fields to HM Revenue and Customs.

The VAT Menu
You can find all the menu options for VAT in the VAT menu, a submenu on the Company menu.

VAT menu

VAT Codes
The VAT is collected and paid at multiple rates specified by the VAT code. Office Accounting automatically set up four VAT codes when a new company is created; E, R, S and Z. To manage the VAT codes, follow these steps:

1. On the Company menu, point to VAT, and then click Manage VAT Codes.

Manage VAT Codes dialog

2. On the Modify VAT Code name window, select a VAT code and click Edit.

VAT Code dialog

Office Accounting keeps track of historical VAT rates. If HM Revenue and Customs should ever lower the standard VAT rate, you can modify the rate here and it will be used from the As of date specified.

The VAT code is usually determined by the type of supply (product or service), but it can also be determined by the circumstances, the customer or the supplier. Most products and services are standard rated with 17.5% VAT.

VAT Codes on Products and Services
Most products and services are subject to VAT. However some products and services are subject to reduced VAT and some are zero-rated or exempt. To define which products are subject to VAT, all products and services have a VAT code which determines how they are taxed.

Non-stock product with VAT code

Unlike products and services, the VAT code is not a required field on nominal accounts.

VAT Codes on Customers and Suppliers
In the cases when you have customers or suppliers with special VAT treatment (VAT registered in another EU country, exports, government etc) you can override the regular VAT codes on the sales or purchase invoice by setting a VAT code on the customer or supplier.

Customer details tab with VAT Code

If the customer or supplier is registered for VAT in another country in the European Union, check the EU registered customer / supplier checkbox and provide the VAT registration number.

If an invoice is made for the customer shown above, the VAT code of the individual products and services will be overridden by the VAT code of the customer:

Invoice with VAT Code from customer

In the example above the materials are standard rated, but the customer is exempt, therefore the VAT code on the invoice is E (Tax Exempt).