Summary
Resolution
▼ The postings made when you record transaction
If your business is registered for VAT you will accrue VAT liability as you enter Vatable transactions into Accounting.
For each VAT period you must submit a VAT Return to report the amount of VAT that is payable or reclaimable for that period.
When you record your transactions, any VAT amounts you include will be recorded against the following VAT nominals.
Invoice Based VAT Scheme (Standard or Flat-Rate Invoice Based)
| 2200 | VAT on Sales | Credit |
| 2201 | VAT on Purchases | Debit |
Cash Based VAT Scheme (Cash Accounting or Flat-Rate Cash)
| 2200 | VAT on Sales | Credit |
| 2201 | VAT on Purchases | Debit |
| 2205 | VAT on Sales Holding Account | Credit (Unpaid Sales Invoices) |
| 2206 | VAT on Purchases Holding Account | Debit (Unpaid Purchase Invoices) |
For a Cash Based VAT Scheme, the VAT value of unpaid invoices is recorded in the VAT holding account nominal until they are paid. At this time the VAT value is moved to the standard VAT nominal account for inclusion on the next VAT Return.
TIP: Bank payments and journals which affect the VAT nominals will directly affect these balances at the time of recording the transaction.
The process of generating and completing a VAT Return also automatically posts the necessary journals to clear the liability on your VAT nominals. The journals posted are as follows (assuming positive liability values for Sales and Purchases):
Standard and Cash Accounting
| 2200 | VAT on Sales* | Debit (Box 1 value) |
| 2202 | VAT Liability | Credit (Box 1 value) |
| 2201 | VAT on Purchases | Credit (Box 4 value) |
| 2202 | VAT Liability | Debit (Box 4 value) |
The overall balance in the VAT Liability nominal represents the payment or reclaim for VAT (Box 5 value). Any adjustments on the VAT Return to Box 1 or Box 4 will be posted using the Corrections nominal 9999.
It’s important to be aware of this as the cumulative balance of this nominal will appear on your Profit and Loss (P&L) report.
Flat Rate Schemes
Recording transactions on a Flat Rate VAT Scheme accounts for VAT in the exact same way as with the Non-Flat Rate Schemes. All VAT liability including that on purchases will be recorded as normal. It is only at the time of creating the VAT Return that the Flat Rate Scheme criteria is applied.
At the time of generating the VAT Return, Accounting will also show a value which represents the gain or loss of monies due to using the Flat Rate Scheme over a Standard Scheme.
For Example:
Sales Invoice: £600 Net + £120 VAT = £720 Total
Purchase Invoice: £300 Net + £60 VAT = £360 Total
On a Standard VAT Scheme, the Box 5 value would be £120 – £60 = £60 payable.
On a Flat Rate Scheme (10%), the Box 5 value would be £72 payable. A difference of £12.
When the VAT Return is saved, the journals that post not only apply the Flat Rate VAT percentage but also account for the purchase VAT recorded and the value that is gained or lost from using this scheme.
| 2200 | VAT on Sales | Debit (Total Sales Value) |
| 2202 | VAT Liability | Credit (Total Sales Value) |
| 2201 | VAT on Purchases | Credit (Total Purchase Value) |
| 2202 | VAT Liability | Debit (Total Purchase Value) |
In addition, the following journals would be posted:
| 2202 | VAT Liability | Credit (Difference Value) |
| 4900 | Other Income | Debit (Difference Value) |
The above posting assumes a loss to the business on this return. Had the business gained money, then the journal would be the exact opposite of that shown.
Any adjustments on the VAT Return to Box 1 or Box 4 will be posted using the Corrections nominal 9999. It’s important to be aware of this as the cumulative balance of this nominal will appear on your Profit and Loss (P&L) report.
TIP: Adjustments to the return will not change the calculated difference value on the VAT Return.
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