VAT scheme

When using the Direct Calculation Scheme 1 the VAT scheme your software should be set to Standard VAT.

• Settings > Company Preferences > VAT > VAT Scheme.

Create a customer House Account

When you've calculated the amount of VAT that can be reclaimed, to correct your Sales Tax Control Account you should post a sales invoice and sales credit. To ensure that these new transactions don't affect any of your existing customer accounts, you should create a new Customer Record.

1. Customers > New/edit.
2. Complete the Customer Record as follows:

   A/C	Enter the account reference for the House account, for example, HOUSE.
   Name	Enter the account name, for example, House Account.

   Complete any other information, as required.
3. Save > Close.

Create the Direct Calculation Sales VAT nominal code

When you post your sales transactions, we advise you to use the standard rate tax code, T1 by default. This means that 20% of your gross sales is posted to the Sales Tax Control Account. When you calculate your output tax, the VAT figure will probably be lower than that in the Sales Tax Control Account. This also means that your net sales have been understated. To correct this you need to move the relevant amount to 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 following section.

1. Nominal codes > New/edit.
2. Complete the details as follows:

   N\C	Enter the nominal code number you want to create, for example, 4498.
   Name	Enter the name of the account, for example, Direct Calculation Sales VAT.

3. Save > Close.

You must now check the Chart of Accounts to ensure the new nominal code is included.

Create a new tax code for lower rated goods

If you've lower rated goods, they must be entered using the relevant tax code. Sage Accounts v10 or above - You may already have tax code T5 set up as a lower rate goods. If not you should create one before proceeding.

NOTE: If you've already created this tax code, please proceed to the following section.

1. Settings > Configuration > Tax Codes tab.
2. Select the tax code to be amended, for example T3 > Edit.
3. Complete the Edit Tax Code window as follows:

   Code	This box is automatically updated by Sage Accounts and displays the tax code.
   Rate	Enter the VAT rate this tax code is to apply to transactions. For example, to set up a 5% VAT rate, enter 5.00 in this box. NOTE: If you select the EC Code check box, the Rate box isn't available.
   Include in VAT Return	To include transactions with this tax code in the VAT Return, select this check box.
   Description	To add a description to your tax code, enter the relevant description in this box.
   EC Code	Don't select this check box.

4. OK.
   If you've any more lower rated goods at different rates then repeat steps 1 - 4 above using a tax code which isn't currently in use.
5. Apply > Close > when prompted to save the changes > No.

Record your purchases received for retail sales at standard rate, lower rate and zero rate

When you're using the Direct Calculation scheme, you should record all of your purchases using the relevant tax codes.

On all purchase transactions recording purchases received for retail sales, you must use the department field to record the mark-up percentage. For example, to record a standard rated purchase invoice for £100 plus 20.00 VAT with a mark-up of 20%, use Department 20 to record the mark-up.

When a purchase received for retail sales is to be recorded you should post either:

• A purchase invoice with either the standard rate, lower rate or zero rate tax code, as applicable.
• A bank payment with either the standard rate, lower rate or zero rate tax code, as applicable.
• A cash payment with either the standard rate, lower rate or zero rate tax code, as applicable.
• A visa payment with either the standard rate, lower rate or zero rate tax code, as applicable.

When a purchase for retail sales is returned, you should post:

• A purchase credit with either the standard rate, lower rate or zero rate tax code, as applicable. You must enter the same department as the related purchase invoice.

Enter retail sales for vatable goods under the Direct Calculation scheme

When you're using the Direct Calculation scheme, you should enter all of your retail sales transactions using the standard rated tax code.

• When a retail sale is made for vatable goods a bank receipt, cash receipt or visa receipt should be posted.
• When a credit sale is made for vatable goods a sales invoice should be posted.
• When credit sale goods are returned a sales credit should be posted.
  

  NOTE: Although you may not know the relevant tax code for the sales transactions, you should always use T1. This applies a standard rate of VAT and updates the Sales Tax Control Account. The Sales Tax Control Account balance is corrected once you've completed the VAT calculations.

Produce the Daily Gross Takings reports

At the end of each VAT quarter you must produce a list of retail sales in that period. This list is produced by running the Gross Takings reports. There are two Gross Takings reports, one which provides a total for transaction types SI, BR, CR, VR, and one which provides a total for transaction type SC.

1. VAT > Reports.
2. VAT Scheme Reports > Daily Gross Takings report > Print.
3. Enter the date range required, for example, the VAT period > OK.
4. Complete the Printer window as required then to print the report > OK.

You've now produced your Daily Gross Takings report, you should repeat this procedure for the Daily Gross Credits report.

When you've produced both reports, you should deduct the total value of the Daily Gross Credits report from the total value of the Daily Gross Takings report. The remaining figure is the net value of your daily gross takings, which is used in your VAT calculation.

Establish which goods are your minority goods

The Direct Calculation scheme requires you to calculate the expected selling price of your minority rated goods. These are either the zero rated, lower rated or standard rated goods which make up the smaller part of your daily gross takings.

The second stage of the scheme requires you to calculate the expected selling price of your minority rated goods. These are the goods, zero rated, lower rated or standard rated, which make up the smaller part of your daily gross takings.

For example, if 60% of retail sales are standard rated, and 40% are zero rated then the minority rated sales are your zero rated goods.

You'd therefore calculate the expected selling price of your zero rated purchases. This total is then used in the calculation of your VAT liability as set out in VAT Notice 727/5 Appendix A1.

However, if 60% of your retail sales are zero rated and 40% are standard rated, your standard rated goods are the minority goods.

You'd therefore calculate the expected selling price of these standard rated purchases. This total is then used in the calculation of your VAT liability as set out in VAT Notice 727/5 Appendix A1.

For further information on determining your minority rated goods, please refer to VAT Notice 727/5 Retail Schemes: How to work the Direct Calculation Schemes.

When you've decided which rated goods are your minority goods, you must calculate the expected selling prices of these goods.

Calculate the expected selling price of your retail goods

The calculation used for the Direct Calculation scheme requires you to know the expected selling price of all of your goods, for all of the relevant tax codes.

1. VAT > Reports.
2. VAT Scheme Reports > VAT reports > select the relevant expected selling price report > Print.

   Report	File name
   Retail Scheme - ESP Lower Rated Credits	AT_ESPLC.report
   Retail Scheme - ESP Lower Rated Goods	AT_ESPLI.report
   Retail Scheme - ESP Standard Rated Credits	AT_ESPSC.report
   Retail Scheme - ESP Standard Rated Goods	AT_ESPSI.report
   Retail Scheme - ESP Zero Rated Credits	AT_ESPZC.report
   Retail Scheme - ESP Zero Rated Goods	AT_ESPZI.report

3. Enter the date range required > OK.
4. Complete the Printer window as required then to print the report > OK.
   Repeat steps 2 to 4 until you've printed the following reports:
   

   NOTE: The lower rated reports pick up transactions posted with a T3 tax code. If you've used a different tax code, please contact Sage Technical Support to edit the report.

5. Subtract the value of the credits report from the total of the goods report. For example, to establish the ESP for lower rated goods, you must subtract the value of the Retail Scheme - ESP Lower Rated Credits report from the total of the Retail Scheme - ESP Lower Rated Goods report.

You've now established the expected selling prices of the goods received and are ready to use these figures in the VAT calculation. If you require further information about the VAT calculation, please refer to your local VAT office. When you've established the output VAT value, please proceed to the following section.

Correct the balance on your Sales Tax Control Account

Once you've used the calculations as specified in VAT Notices 727/4, you need to correct the balance on your Sales Tax Control Account. This balance is incorrect because you've recorded all of your sales at the standard rate and then applied the Direct Calculation VAT Scheme calculation to your sales.

NOTE: In this example the balance on the Sales Tax Control Account is £225. This is made up of standard rate VAT applied to £1000 sales. Using the VAT calculation the output tax was calculated at £200.

To correct the balance on the Sales Tax Control Account you should:

• Post a sales credit to the customer House Account to remove the difference between the balance on the Sales Tax Control Account and the calculated output tax, for example, £25.
• Post a sales invoice to the customer House Account to correct the balance on the customer House Account, and move the relevant amount of sales VAT to the Direct Calculation Sales VAT nominal code.

Post the sales credit

1. Customers > Batch Credit.
2. Enter the relevant information to record the credit details, for example:

   A/C	Date	N/C	Details	Net	T/C	VAT
   HOUSE	Date within the VAT period	4498	Direct Calculation Sales VAT	0.00	T1	25.00

3. Save > Close.

This sales credit reduces the balance on the Sales Tax Control Account.

Post the sales invoice

1. Customers > Batch Invoice.
2. Enter the relevant information to record the invoice details, for example:

   A/C	Date	N/C	Details	Net	T/C	VAT
   HOUSE	Date within the VAT period	4498	Direct Calculation Sales VAT	25.00	T1	0.00

3. Save > Close.

This customer invoice corrects the Debtors Control Account and posts the value to the Direct Calculation Sales VAT nominal code.