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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 sign-up all business for MTD as part of the VAT registration service.

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

You 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. You must 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
  • VAT can only be reclaimed once you pay 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 .

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

This explains how we record VAT in your ledger accounts so you can understand how this shows on your financial reports and find out how much you need to pay HMRC.

How the VAT element of transactions records in the ledger accounts varies depending on the VAT Scheme that you have used. Here we explain the main differences between Standard VAT and Cash Accounting:

Standard VAT

  • On this scheme you pay or reclaim the VAT at the point you create an invoice. It doesn't matter if you have recorded a payment for the invoice or not
  • When you enter a sales invoice or other receipt, we record the VAT amount in the 2200 VAT on Sales ledger account
  • When you enter a purchase invoice or other payment, we record the VAT in the 2201 VAT on Purchases ledger account
  • When you submit a VAT return, we transfer the amounts from VAT on Sales and VAT on purchases ledger accounts to the 2202 VAT Liability ledger account to tell you how much you owe to HMRC. The balance of the VAT on Sales and VAT on Purchases Ledger accounts is now zero
  • If you make any adjustments or corrections after submitting the VAT return, we add the amounts to the 2203 VAT Allocations & Adjustments ledger account
  • When you pay your VAT return, we update the VAT liability ledger account with the amount of the payment. When you have fully paid your VAT, the balance of the VAT liability ledger account is zero
  • If you have amounts remaining in your VAT ledger accounts after you pay your VAT, you may need to enter journals to clear these value
  • Clear the VAT amounts from ledger accounts

Cash Accounting

  • On this scheme you only pay or reclaim VAT when your customer pays an invoice you have created, or you pay your supplier for a purchase
  • When you enter an other receipt, we record the VAT amount in the 2200 VAT on Sales ledger account
  • When you create a sales invoice, we record the VAT amount 2204 - VAT on Sales Holding Account ledger account. This is so you can see how much VAT you owe once you receive payments from your customers
  • When you receive payment of a sales invoice, we transfer the VAT amount to the 2200 VAT on Sales ledger account. This is now reported on your next VAT return
  • When you enter an other payment, we record the VAT in the 2201 VAT on Purchases ledger account
  • When you create a purchase invoice, we record the VAT in the 2205 - VAT on Purchases Holding Account ledger account. This is so you can you see how much VAT you can reclaim, once you pay your suppliers
  • When you pay your supplier, we transfer the VAT amount to the 2201 VAT on Purchases ledger account. This is now reported on your next VAT return
  • When you submit a VAT return, we transfer the amounts from VAT on Sales and VAT on purchases ledger accounts to the 2202 VAT Liability ledger account to tell you how much you owe to HMRC. The balance of the VAT on Sales and VAT on Purchases Ledger accounts is now zero
  • If you make any adjustments or corrections after submitting the VAT return, we add the amounts to the 2203 VAT Allocations & Adjustments ledger account
  • When you pay your VAT return, we update the VAT liability ledger account with the amount of the payment. When you have fully paid your VAT, the balance of the VAT liability ledger account is zero

  • If you have amounts remaining in your VAT ledger accounts after you pay your VAT, you may need to enter journals to clear these values

     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 might 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 codes 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
  • Change the VAT value to the correct amount, this ensures that the transaction shows on your next VAT Return, and the amount of VAT is correct

Read about VAT rates.

Trading outside the UK

There can be different VAT charges if you buy or sell outside the UK, depending on what you are trading, and the VAT status of your 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 might 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

You must 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)