VAT in Sage Accounting

Summary

Information on VAT in Sage Accounting.

Resolution

Here we explain how we handle VAT in Sage Accounting, including how to work with Making Tax Digital (MTD) for VAT.

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 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.

The flat rate scheme is intended to help small businesses reduce the amount of time they spend on VAT. Under this scheme, you pay a flat rate percentage of your turnover as VAT. You enter transactions as normal, using the normal VAT rates. On your VAT return, we calculate VAT based on your flat rate percentage.

On this scheme you can choose either:

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

Apply to HMRC to 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 rate applicable to your business when you register.

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 use. 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 does not 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 pay need to enter journals to clear these values

Clear the VAT amounts from 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 as 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 pay need to enter journals to clear these values. Clear the VAT amounts from 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

To help you choose the correct VAT rates when you record your sales and purchases, check out our VAT rate guide .

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.

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.

VAT in Sage Accounting

Summary

Resolution

Making Tax digital for VAT (MTD)

Supported VAT schemes

Standard

Cash Accounting

Flat rate scheme

How we record VAT in your ledger accounts

Standard VAT

Cash Accounting

VAT rates to use

Other VAT rates

Trading outside the UK

The VAT Return

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