Create a new nominal code

If you're using the Sage default nominal ledger structure we suggest you use the following nominal code. If you've already created this nominal code, please proceed to the section, Create the partial exemption tax codes.

Nominal Code	Name	Management report	Section of report
7950	Non Reclaimed VAT	Profit and Loss	Overheads

1. Click Nominal codes then click New.
2. Complete the details as follows:
   

   N/C*	Enter the nominal code number you want to create, for example, 7950.
   Name	Enter the name of the account, for example, Non Reclaimed VAT.

   *This information is mandatory.
3. Click Save then click Close.

You've created the new nominal code. You must now check the Chart of Accounts to ensure that the new nominal code is included. You should now configure the tax codes to use on your partial exemption transactions. For further information about this, please refer to the following section.

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Create the partial exemption tax codes

The following tax codes and settings are required:

NOTE: If you are already using any of these tax codes for other purposes, you can use the next available unused tax code instead. 

Code	Rate	Include in VAT Return	EC Code
T6	20.00%	Yes	No
T12	20.00%	Yes	No
T13	20.00%	Yes	No

1. Click Settings then click Configuration and click the Tax Codes tab.
2. Select the required tax code then click Edit.
3. Complete the Edit Tax Code window as required then click OK.
   

   TIP: For further information about the required tax codes, please refer to the table above.

4. Click Apply then click Close and if prompted to save changes, click No.
   
   Sage 50 Accounts Essentials - Click Save then click Close.

You've created your new tax codes and prepared Sage Accounts for partial exemption. You should now process your transactions ensuring that you apply the correct tax code to each transaction. For further information about this, please refer to the following section.

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Which tax codes to use on transactions

Enter any income transactions, such as sales invoices or bank receipts, using the following tax codes:

T0	To enter zero rated transactions.
T1	To enter standard rated transactions.
T2	To enter transactions that are classed as exempt, but used in the partial exemption calculations.
T5	To enter reduced rate transactions.
T6	For items to be excluded from the calculation whether they're taxable or exempt. For example, the sale of capital goods, incidental real estate or financial transactions and self supplies.
T9	To enter transactions on which VAT isn't applicable, for example, bank transfers.

Expenditure transactions

Enter any expenditure transactions, such as purchase invoices or bank payments, using the following tax codes:

T0	To enter zero rated purchases.
T1	To enter expenditure transactions that include VAT, for goods and services directly relating or attributable to your standard rated income.
T5	To enter reduced rate transactions.
T9	To enter expenditure on which VAT isn't applicable, for example, wages.
T12	For all other expenditure on which VAT is charged, that's expenditure not relating or attributable to either vatable or exempt income.
T13	To enter supplier invoices that include VAT, for goods and services directly relating or attributable to your exempt income.

If you haven't already created these tax codes, please refer to the previous section.

Calculate the total exempt Input VAT

Calculate the non-related Input VAT (Figure A)

NOTE: To calculate the annual adjustment figure, use the same calculation for the entire tax year, rather than the VAT period. For further information about this please refer to customs.hmrc.gov.uk

1. Click VAT then click VAT Return.
2. Click Calculate VAT Return and click the figure in Box 4.
3. Calculate the non-related Input VAT as follows:
   
   Non-related Input VAT (Figure A) = T12 Purchase Invoices - T12 Purchase Credits + T12 Payments + T12 Journal Debits
   
   
4. Click Close.

Calculate the required percentage (Figure B)

1. Click the figure in Box 6.
2. Calculate the totals for T0, T1, T2 and T5 as follows:
   • T0 total = Sales Invoices - Sales Credits + Receipts + Journal Credits
   • T1 total = Sales Invoices - Sales Credits + Receipts + Journal Credits
   • T2 total = Sales Invoices - Sales Credits + Receipts + Journal Credits
   • T5 total = Sales Invoices - Sales Credits + Receipts + Journal Credits
3. Using the above totals, calculate the required percentage as follows:
   
   

   Required percentage (Figure B) =	(T0 + T1 + T5)	x 100
   	(T0 + T1 + T2 + T5)

   
   If the amount of non-related Input VAT (Figure A) is less than £400,000, round up the required percentage to the next whole number. If Figure A exceeds £400,000, round the figure up to two decimal places.

Calculate the non-recoverable element of the non-related Input VAT (Figure C)

Calculate the non-recoverable element of the non-related Input VAT as follows:

Non-recoverable non-related Input VAT (Figure C) = Figure A - (Figure A x Figure B)

For example, if the non-related Input VAT (Figure A) is £10,000, and the required percentage (Figure B) is 72 %, the calculation is as follows:

Non-recoverable non-related Input VAT = 10,000 - (10,000 x 72%) = 10,000 - 7,200 = 2,800

Calculate the Input VAT related to exempt supplies (Figure D)

1. Click the figure in Box 4.
2. Calculate the Input VAT related to exempt supplies as follows:
   
   Input VAT related to exempt supplies (Figure D) = T13 Purchase Invoices - T13 Purchase Credits + T13 Payments + T13 Journal Debits
   
   
3. To close the VAT Breakdown - VAT reclaimed on Purchases window, click Close.

Calculate the total exempt Input VAT (Figure E)

Calculate the total exempt Input VAT as follows:

Total exempt Input VAT (Figure E) = Non-recoverable non-related Input VAT (Figure C) + Input VAT related to exempt supplies (Figure D)

You've now calculated the total exempt Input VAT. You should now compare this to the De Minimise limit to determine if you can reclaim all of your Input VAT. For further information about this, please refer to the following section.

Check against the De Minimise limit

If your total exempt Input VAT (Figure E) is less than the De Minimise limit, you can reclaim all of your Input VAT.

The De Minimise limit is:

• Not more than £625 per month on average and
• Not more than half of your total Input VAT in the period.

If the total exempt Input VAT for the period is below the De Minimise limit, relief is available and all of your Input VAT is recoverable. If all of your Input VAT is recoverable, please refer to the section, Reclaim all of your Input VAT.

If the total exempt Input VAT for the period is above the De Minimise limit, relief isn't available, which means that only part of your Input VAT is recoverable. If only part of your Input VAT is recoverable, please refer to the section, Reclaim part of your Input VAT.

Reclaim all of your Input VAT

1. Click Settings and click Change Program Date then click Default Program Date and enter the final day of the VAT period you're reconciling then click OK.
2. Click VAT and click VAT Return then click Calculate VAT Return.
   
   The figures that appear are the correct values for the period.
3. Once the VAT liability has been agreed, click Reconcile then post the VAT transfer journal as usual. For further information about this, please refer to the instructions for The VAT Return Option.

You've now reclaimed all of your Input VAT under partial exemption. Under this scheme, you're also required to make an annual adjustment. For further information about this, please refer to the section, Post the annual adjustment.

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Reclaim part of your Input VAT

1. Click Settings and click Change Program Date then click Default Program Date and enter the final day of the VAT period you're reconciling then click OK.
2. Click VAT and click VAT Return then click Calculate VAT Return.
3. Click Make adjustments then in the Box 4 Adjustment column click the edit option.
4. Complete the VAT Manual Adjustments window as follows:

   Reason	Enter the reason for the adjustment, for example Partial Exemption annual adjustment.
   Adjustment	Enter the value that the box should be adjusted by. In this case Figure E. If you've over claimed VAT, the value should be reduced and you must prefix the figure with the minus sign.

   
   

   NOTE: As the box value is to be reduced, prefix the figure with the minus sign.

5. Click Save then click Close.
6. Once the VAT liability has been agreed, click Reconcile then post the VAT transfer journal as usual. For further information about this, please refer to the instructions for The VAT Return Option.
   

   NOTE: The amounts to transfer are those that appear on the VAT Return before entering any adjustments.

7. Click Nominal codes then click Journal entry.
8. Complete the Journal Entry window as follows:

   N/C*	Name	Details	T/C*	Debit	Credit
   2204	Manual Adjustments	Irrecoverable VAT	T9	0.00	Total exempt Input VAT (Figure E)
   7950	Non Reclaimed VAT	Irrecoverable VAT	T9	Total exempt Input VAT (Figure E)	0.00

   *This information is mandatory.
9. Click Save then click Close.

You've written off the non-reclaimable portion of your Input VAT. Under this scheme, you're also required to make an annual adjustment. For further information about this, please refer to the section, Post the annual adjustment.

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Post the annual adjustment

1. Click Settings and click Change Program Date then click Default Program Date and enter the date you want to make the adjustment then click OK.
2. Click VAT and click VAT Return then click Calculate VAT Return.
3. Click Make adjustments then in the Box 4 Adjustment column click the edit option.
4. Complete the VAT Manual Adjustments window as follows:
   

   Reason	Enter the reason for the adjustment, for example Partial Exemption annual adjustment.
   Adjustment	Enter the value that the box should be adjusted by. If you've over claimed VAT, the value should be reduced and you must prefix the figure with the minus sign.

5. Click Save then click Close.
6. Once the VAT liability has been agreed, click Reconcile then post the VAT transfer journal as usual. For further information about this, please refer to this article.
   
   The amounts to transfer are those that appear on the VAT Return before entering any adjustments.
7. Click Nominal codes then click Journal entry.
8. Complete the Journal Entry window as follows:
   • If you've over claimed VAT, post the following journal:

     N/C*	Name	Details	T/C*	Debit	Credit
     2204	Manual Adjustments	Annual adjustment	T9	0.00	Amount of VAT over claimed
     7950	Non Reclaimed VAT	Annual adjustment	T9	Amount of VAT over claimed	0.00

   • If you've under claimed VAT, post the following journal:

     N/C*	Name	Details	T/C*	Debit	Credit
     2204	Manual Adjustments	Annual adjustment	T9	Amount of VAT under claimed	0.00
     7950	Non Reclaimed VAT	Annual adjustment	T9	0.00	Amount of VAT under claimed

     *This information is mandatory.
9. Click Save then click Close.