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VAT in Sage Accounting Start

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Summary

How to handle VAT in Accounting Start, including how to work with Making Tax Digital (MTD) for VAT.

Resolution

Making Tax digital for VAT (MTD)

 

All businesses must keep digital records of their transactions and submit their VAT returns to HMRC using MTD compatible software such as Sage Accounting.

HMRC automatically signs up all business for MTD as part of the VAT registration service.

Tell HMRC that you authorise Sage Accounting to submit your VAT returns. You do this from the Settings in Sage Accounting.

You can then submit your VAT returns to HMRC from Sage Accounting when they are due.

Read about how to get set-up for VAT

Supported VAT schemes

You usually select your VAT Scheme when you sign up and enter your basic company information. Check your VAT scheme before you enter any transactions to make sure you include the correct VAT.

We support the following VAT schemes:

Standard

Most businesses use this VAT scheme. Under this scheme:

  • When your supplier sends you an invoice, you can reclaim VAT
  • When you invoice your customers, you must pay VAT

Cash Accounting

On the Cash Accounting Scheme

  • You pay VAT when your customer pays you
  • You can only reclaim VAT once you've paid for your purchases

The advantages of this scheme are:

  • It’s good for cash flow, especially if your customers are slow to pay
  • If your customer doesn't pay you, you won't have to pay VAT

To join the scheme, your VAT taxable turnover must be £1.35 million or less.

 Read more about VAT Cash Accounting 

Flat rate scheme

A flat rate scheme simplifies VAT for small businesses. Pay a fixed percentage of turnover as VAT. Transactions record normally. VATs calculated based on fixed rate for returns.

You can choose either:

  • Invoice based. You pay VAT when you receive invoices similar to the standard VAT scheme
  • Cash based. You pay VAT when you pay your invoices, similar to the cash accounting scheme

Apply to HMRC if you want to use the flat rate scheme. Your VAT taxable turnover excluding VAT, needs to be less than £150,000. Find out more at HMRC.

There is a range of flat rate percentages. The percentage that you use depends on your business sector. HMRC advises you of the rates applicable to your business when you register.

Read more about the Flat Rate VAT scheme.

If your company isn't VAT registered, select Not Registered.

Read about how to get set-up for VAT.

How we record VAT in your ledger accounts

We record VAT in ledger accounts to reflect on financial reports and determine HMRC payments accurately.

VAT recording in ledger accounts varies by scheme. Standard VAT records upon invoice creation, while Cash Accounting records upon payment.

Standard VAT

  • VATs paid or reclaimed upon invoice generation, irrespective of payment logging, in this scheme
  • Sales invoices or other receipts record VAT in the 2200 VAT on Sales ledger account

  • Purchase invoices or other payments record VAT in the 2201 VAT on Purchases ledger account

  • Upon VAT return submission, VAT on Sales and Purchases ledger amounts move to 2202 VAT Liability, zeroing ledger balances
  • After submitting the VAT return, we add adjustments or corrections to the 2203 VAT Allocations & Adjustments ledger account

  • Payment of VAT return updates VAT liability ledger with payment amount. Fully paid VAT results in zero balance in the liability ledger

  • If you have amounts remaining in your VAT ledger accounts after you pay your VAT, you need to enter journals to Clear the VAT amounts from ledger accounts
  • Clear the VAT amounts from ledger accounts

Cash Accounting

  • In this scheme, VAT paid or reclaimed upon customer invoice settlement or supplier payment

  • Other receipts record VAT in the 2200 VAT on Sales ledger account
  • Sales invoices record VAT in 2204 - VAT on Sales Holding Account for tracking owed VAT upon customer payments
  • Upon receiving payment for a sales invoice, VAT amount transfers to the 2200 VAT on Sales ledger account, reported in the next VAT return
  • Other payments record VAT in the 2201 VAT on Purchases ledger account
  • Purchase invoices record VAT in the 2205 - VAT on Purchases Holding Account to track reclaimable VAT upon supplier payment
  • Upon paying your supplier, VAT amount transfers to the 2201 VAT on Purchases ledger account, reported in the next VAT return
  • Upon VAT return submission, amounts from VAT on Sales and Purchases ledger accounts transfer to 2202 VAT Liability, zeroing ledger balances
  • We add adjustments or corrections to the 2203 VAT Allocations & Adjustments ledger account after the VAT return

  • Settling your VAT return updates the VAT liability ledger with payment, effectively clearing the balance upon full payment

  • If you have amounts remaining in your VAT ledger accounts after you pay your VAT, you need to enter journals to Clear the VAT amounts from ledger accounts

VAT rates to use

Depending on what you buy or sell, there are several different VAT rates, which apply.

To keep things simple, we set up and update the VAT rates for you. Simply choose the appropriate VAT rate for your transaction. The VAT rates you can choose are:

  • Standard. This is the most common rate for transactions. Currently 20%
  • Lower rate or Reduced rate. Used for certain goods and services, such as children’s car seats and home energy. Currently 5%
  • Zero Rated. Used for certain goods and services such as most food and children’s clothes. Currently 0%
  • Exempt – for transactions exempt from VAT, such as postage stamps, financial and property transactions. The net amount still appears on your VAT Return
  • No VAT – for transactions not involving VAT. These don’t appear on your VAT Return

Other VAT rates

You cannot create your own VAT rates (such as the T code in Sage 50).

Some businesses use a sub-scheme to calculate VAT differently to the Standard 20%. So to record transactions with a different VAT rate:

  • Enter the transaction and select the Standard rate
  • Adjust the VAT value to ensure accurate reporting on your next VAT return and maintain correct VAT amounts

Read about VAT rates.

Trading outside the UK

VAT charges vary for transactions outside the UK, based on the trade nature and VAT status of the customer or supplier.

If you sell goods and services to customers outside the UK, you must enter a valid VAT number on their contact record. When entering transactions, choose whether each line on the invoice is for goods or services and we'll apply the necessary VAT.

VAT on overseas sales

When you buy goods from outside the UK, you may need to pay import VAT and duty. This applies if the goods you purchased are subject to VAT in this country. Depending on how you manage import VAT and duty, VAT can calculate differently.

Import VAT and duty

You can use Postponed Accounting to record VAT on these imports, to help improve business cash flow.

Read more about postponed accounting for import VAT and duty for GB businesses

The VAT Return

Send regular VAT returns to HMRC. This could be once a month, quarterly or once a year.

We automatically work out VAT when you enter your transactions. The calculations take account of:

  • Your VAT scheme
  • The VAT rate you select
  • The location and VAT number of the customer or supplier the transaction is for

Read about how each value on the return calculates.

Depending on when your VAT return is due, you will need to:

  • Create the VAT return from Sage Accounting
  • Submit it to HMRC

Read about how to create and submit a return to HMRC.

Related Solutions

Get the Sage Small business guide to VAT (opens in new window)