manual double entries for VAT zero/exempt

I will be keeping manual accounts for a while so checking for help with correct entries

Didn't find your answer?

I obviously know the basic entries for accounting for VAT for both input and output tax BUT how can I create journals that correctly identify the purchase and sale of goods at the VAT rates Standard, Reduced, Zero and exempt. The only solution I can find is to have a code (0 - zero  1 - standard 2 - reduced 3- exempt) and  to create separate accounts for each VAT rate and type and have dummy double entry accounts with the opposite entry for sales and purchases. This would create a value for box 6 on the VAT return. Can anyone provide a better solution?

Replies (34)

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By Wanderer
04th Mar 2024 07:43

Why manual? I'd go for:-

https://www.vtsoftware.co.uk/prices/index.htm

You are going to need something to comply with MTDforVAT & probably MTDforIT in the future so why not start off with a programme that lets you do these and covers your book-keeping needs?

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Replying to Wanderer:
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By Galactus
04th Mar 2024 08:01

Hi Guys.
Perhaps I needed to give you more information. I am part of a group of retirees setting up a community shop which will be starting to trade sometime next year.
We are in process of incorporating the company which will be a non profit business.
I will be looking at accounting software when we have purchased our Epos till but I want to register for VAT as soon as I can as we will be spending a fair amount BEFORE we start to trade, assuming we can access grants to cover our expenses, so will be in a position of reclaiming VAT for several returns BEFORE I have any software to do the job for me. I am used to accounting software BUT its a while since I last used manual accounting so just asking for verification that my suggested solution will work?

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By paulhammett
04th Mar 2024 07:48

Agree with Wanderer. VT Transaction is easy to use and excellent value for money.

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Scalloway Castle
By scalloway
04th Mar 2024 08:05

I initially used VT Transaction for a start up community enterprise which had both standard rated and exempt incomes streams and it worked very well.

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VAT
By Jason Croke
04th Mar 2024 08:24

You cannot file VAT returns manually, you have to use either accounting software such as Xero or if you are using Excel type spreadsheets, then you need bridging software to file the returns for you. There are free bridging software solutions out there, Google is your friend.

If the plan is to trade eventually, when you do start trading, you'll only have the pain of transferring your manual records over to a digital one, so why not just start off digital?

I note you state you haven't secured any grants as yet and so what would happen if you spend a load of money and the grants don't come through? If you deregister for VAT, HMRC may want you to repay previously reclaimed input tax if there was no real chance of the business taking off (starting a business without any grants in place) and even if HMRC accept it was a genuine business that didn't take off, depending on what you have bought and reclaimed VAT on, you may need to declare output tax when you deregister for VAT.

I'm not trying to dissuade you from registering for VAT, more a case of just make sure you understand the pros and cons of registering for VAT a whole year before the business intends to make a sale and before it has even secured funding. If you buy £10k of shop fittings and equipment, you may need to pay output tax on these items should you later deregister for VAT in the event the business doesn't take off and you want to deregister/close the business.

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Replying to Jason Croke:
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By Galactus
04th Mar 2024 08:42

Hi Jason,
Thank you for your response to my post. We have secured a grant from the Parish Council which will cover the cost of incorporation but cannot buy anything until we have grants as we have no funds at the moment. We are in contact with another non profit shop which has been trading for 20 years so will be looking forward to them sharing their experiences with our group. I do understand what you are saying and I thank you for pointing out the possible shortfalls of registering early. I have found out that we can claim input VAT for up to four years prior to commencment of trading but we need to be able to supply backdated VAT invoices for any sales prior to registeration. If I do not claim the VAT paid on our setup costs then they will obviously be part of our initial costs and therefore will impact on our ability to show a return for quite a long period. The alternative is to register as soon as possible to minimise the costs of setup. As this is a community project we believe we will be able to access funds to enable us to cover the setup costs (including VAT!) but I will certainly make the rest of the committee aware of the possible outcome if we do want to deregister. Thank you again for your input.

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By Truthsayer
04th Mar 2024 08:33

You haven't given enough detail for us to understand the problem. Why do you need to separate out the different rates? Just get the VAT correct on each transaction, and the VAT return figures will take care of themselves as totals. No separation of rates is required.

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Replying to Truthsayer:
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By Galactus
04th Mar 2024 08:46

Hi Truthsayer,
The VAT return asks for the figure of VATable sales and purchases which therefore includes net of VAT figures for standard, reduced and zero rated VAT entries. The VAT figure will of course be correct BUT the purchases and sales will only include standard and reduced rate items. Also I need to completely exclude exempt items so this needs to be recorded as well.

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Replying to Galactus:
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By Truthsayer
04th Mar 2024 09:18

'BUT the purchases and sales will only include standard and reduced rate items'

No, that's wrong. You should include all exempt and zero rated items, so no separation is necessary. You seem to be looking for a solution to a non-existent problem.

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Replying to Truthsayer:
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By Galactus
04th Mar 2024 09:42

Sorry Truthsayer I do not understand your comments?

Exempt items are excluded from VAT returns completely and zero rated items by definition will not be included in the VAT figures as they are zero but I still need to include the sales figures in the appropriate boxes on the VAT return

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Replying to Galactus:
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By Truthsayer
04th Mar 2024 12:35

You don't seem to understand how to do a VAT return. I suggest you get professional advice, as you wrong or self-contradictory on nearly everything you have said.

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Replying to Galactus:
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By lionofludesch
04th Mar 2024 22:25

Galactus wrote:

Sorry Truthsayer I do not understand your comments?

Exempt items are excluded from VAT returns completely and zero rated items by definition will not be included in the VAT figures as they are zero but I still need to include the sales figures in the appropriate boxes on the VAT return

Are you saying you have zero zero-rated items or you don't need to include zero-rated items because they're zero-rated?

If the latter, you're wrong. Zero-rated items are taxable. They're just taxable at 0%. It's a distinction often misunderstood.

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Replying to lionofludesch:
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By Galactus
05th Mar 2024 07:09

Hi lionofludesch,
I am aware that I need to include zero rated items in my return but in a manual system I need to establish the sale value/purchase value of the zero rated items in order to include them in my VAT return. The only items excluded from the return are Exempt items.

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Replying to Galactus:
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By lionofludesch
05th Mar 2024 07:36

Right. So what are you selling? Because that's a helluva mix. Not many small businesses have sales at standard, reduced, zero and exempt. Is it a retail business ? Do you not invoice any of your sales?

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Replying to lionofludesch:
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By Galactus
05th Mar 2024 08:04

Hi lionofludesch,
The business is a community retail shop. The majority of sales/purchases will be zero rated but some will be standard. I do not anticipate any reduces VAT items but just included them in case. There will be no sales invoices, justtill receipts.

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Replying to Galactus:
Scalloway Castle
By scalloway
05th Mar 2024 07:39

Surely you will post into your accounting system from invoices received which will indicate any VAT reclaimable. Your EPOS system will have the buttons set up to identify the VAT status of the various sales which will be identified on the reports printed out.

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Replying to scalloway:
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By lionofludesch
05th Mar 2024 07:50

I was thinking that he didn't have an EPOS system.

In which case, he'd be looking at retail schemes. They fall into four broad categories, point of sale, grossing up, apportionment, custom.

They don't all give the same answer.

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Replying to scalloway:
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By Galactus
05th Mar 2024 08:08

Hi Scalloway,
I agree with everything you are saying BUT at the moment we have no accounting software or Epos till so I am trying to post manually. I have now decided to postpone VAT registration until we are ready to trade so my initial post is no longer valid but rthank you for your replies.

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Replying to Galactus:
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By lionofludesch
05th Mar 2024 10:15

We haven't always had software and EPOS, you know.

We used to muddle through with an Evrite book and a biro. Or pencil for the less confident.

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Replying to lionofludesch:
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By Galactus
05th Mar 2024 10:43

I used to write my own programs and some were still in use when I retired from the company in 2017. They were written in Dbase 3 which I had been using since 1983 and would still be using today if the later versions had not abandoned DOS and went windows!! Dbase waas brilliant and so reliable.

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Replying to Galactus:
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By Truthsayer
05th Mar 2024 10:43

'Exempt items are excluded from VAT returns completely'

No they aren't. I keep telling you this, but you keep not taking it on board, so I give up. Appoint an accountant.

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Replying to Truthsayer:
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By Galactus
05th Mar 2024 11:10

I am sorry but I am an accountant. The following is an extract from the HMRC website
These items are exempt from VAT so are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes.

Please tell me why you insist I should be reporting Exempt sales/purchases?

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Replying to Galactus:
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By lionofludesch
05th Mar 2024 11:21

Galactus wrote:

I am sorry but I am an accountant. The following is an extract from the HMRC website
These items are exempt from VAT so are not taxable. You do not include sales of exempt goods or services in your taxable turnover for VAT purposes.

Perfectly true. But it doesn't say you should show them on your VAT return.

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Replying to Galactus:
Scalloway Castle
By scalloway
05th Mar 2024 11:26

Para 3.8 Filling in box 7 of this guide tells you what to enter on your VAT Return. It says "Show the total value of your purchases and expenses but leave out any VAT." It then gives a list of items not to include. You will note this list does not include exempt payments, meaning they should be included in the value of purchases.

https://www.gov.uk/guidance/how-to-fill-in-and-submit-your-vat-return-va...

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Replying to Galactus:
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By DKB-Sheffield
05th Mar 2024 11:29

This may be an occassion where both you and Truthsayer are correctly referencing HMRC guidance... but where the one of those references is not looking in the right place...

It is true that exempt sales are not included in taxable turnover for the purpose of registration - or otherwise. It is not turnover for VAT purposes.

However...

For HMRC's return requirements, the information for sales and purchases is included here (apologies for the long URL, it goes to Box 6 of the notice)... https://www.gov.uk/guidance/how-to-fill-in-and-submit-your-vat-return-va...

You will note, box 6 and 7 include exempt items (box 6 specifically stating this, box 7 is by omission).

I realise this is teaching granny to suck eggs but, something doesn't add up.

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VAT
By Jason Croke
04th Mar 2024 09:52

"I have found out that we can claim input VAT for up to four years prior to commencment of trading but we need to be able to supply backdated VAT invoices for any sales prior to registeration. If I do not claim the VAT paid on our setup costs then they will obviously be part of our initial costs and therefore will impact on our ability to show a return for quite a long period. The alternative is to register as soon as possible to minimise the costs of setup."

What you state is not correct. Or at least the language used does not fit with the language in the legislation.

You can reclaim VAT 4 years prior to "VAT registration", not "commencement of trading". You might see commencement of trade as the same as VAT registration but they are different, a business can trade happily without VAT registration until they hit the VAT registration threshold of £85k turnover.

If you incur expenditure in all of 2024 up to December 2024, then, let's say you register for VAT from 01 January 2025. Any sales FROM 01 January 2025 would then be subject to VAT but not any sales prior to that date.

You can reclaim input tax on purchases going back 4 years for goods (only 6 months for services), so if you register from 01st January 2025 you have no historical output tax to declare on sales but can still reclaim VAT on those 2024 purchase invoices.

Note the 6 month rule for services and 4 years rule for goods. The trap here is that things like shopfitting and construction work is a service, so any building works fall under the 6 month rule, so if you register for VAT from 01st January 2025 you can only go back and reclaim shop fitting/service invoices 6 months prior to that date. Goods that haven't been installed such as shelving or stock fall under the 4 year rule.

You also mention that you if you don't claim VAT paid on your setup costs then they will be part of your initial costs and will impact on your ability to show a return for quite a long period....not sure I understand the point.....yes, if you can reclaim some input tax, then it means you have slightly more funds to spend in terms of cash/cashflow, but in terms of accounts, you'd have nil sales and £x on expenditure creating a loss at the end of the financial year, the VAT reclaimed isn't turnover or income.

I think you should speak with other organisations first to get a better understanding of what is possible, best practice....for example you are setting up a Ltd, but is it limited by guarantee? What do you mean "we're going to be non profit", hopefully you intend to make at least a surplus but what are you going to do with that surplus? The Articles of Association will help determine whether surplus is reinvested in the business or can be taken out as dividends to the Directors.

Before jumping onto the VAT rollercoaster, I'd suggest you ask around and get some more understanding and examples from other organisations/charities and then once comfortable with the pros/cons, you'll be better informed when you hop on board.

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Replying to Jason Croke:
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By Galactus
04th Mar 2024 10:19

I understand what you are saying and will take it on board and also report the outcome of my post to the other members of the steering committee. Just to answer some of the points you make we are going to be a Community Based Society limited by guarantee and by non profit we will NOT be paying any sort of return to shareholders but will be investing any return either in the shop or the village hall which is technically our landlord although not charging rent.
Thank you everyone for your excellent responses.

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By paul.benny
04th Mar 2024 10:17

I commend your efforts and also for seeking guidance before you act.

That said, there are going to be numerous accounting and tax issues that may be beyond the skill and experience of the parties, even though you clearly have some knowledge. You've already mentioned seeking advice from a similar long established venture. May I suggest that you also need an accountant with relevant experience.

If this is a not-for-profit community venture, surely there are people in your community that would support without charge or at low cost? Jason is generous with his considerable VAT expertise but that is possibly one of the more straightforward accounting and tax matters you will encounter.

Support from someone in practice may also help you get access to Xero or similar at a more competitive price than a stand-alone subscription.

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Replying to paul.benny:
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By Galactus
05th Mar 2024 07:21

Hi Paul,
Thank you for your comments. I have extensive accounting knowledge BUT have never been involved in a start up or not for profit business therefore my manual double entry knowledge is rusty and I just needed to see if anyone had a better method of calculating the sales/purchases of the various rates of VAT including the 0% and exempt items. Having received several very helpful messages I am now going to recommend that we do not register for VAT until we are almost ready to start trading. This will enable me to purchase an Epos till and the necessary accounting software BEFORE having to complete VAT returns thereby negating the necessity of manual bookkeeping. Once again thank you to everyone who replied, I am grateful for your constructive comments.

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By Matrix
05th Mar 2024 08:08

Assuming you will be a Director, then you need to ensure that you are acting in the best interests of the company and determine whether (after taking advice) a voluntary registration just to assist cashflow is the optimal course of action.

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By DKB-Sheffield
05th Mar 2024 11:50

Out of interest... when you say 'manual', are you referring to pen, ink and paper ledgers?

Whilst I admire it if you are - from a pure nostalgia point of view - I wouldn't even consider spending the additional time doing this nowadays.

As others have said, MTD requires digital records at some stage in the process which will certainly require duplcation of effort.

If by 'manual' you are actually referring to not using commercial software (e.g. you use Excel etc.), that is a different case. In fact, I'd not be calling this manual bookkeeping at all.

The above said, whilst the NfP is in it's early days, and whilst an EPOS may be a decision for future (cost saving)... storing accounting in a digital format would certainly be advised.

Manual records will likely incur more work and higher costs for annual accountancy, or independent review purposes (I'm assuming the community enterprise will require additional verfication of figures - it likely should).

The good news, there are plenty of low cost, or free spreadsheet templates out there - some may be specifically designed for community shops!

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Replying to DKB-Sheffield:
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By lionofludesch
05th Mar 2024 12:12

I would have been thinking "make notes on a sheet of analysis paper until the software's up and running". Hopefully not too far in the future.

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Replying to DKB-Sheffield:
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By Galactus
05th Mar 2024 12:19

Hi DKB,
I have always been a basic "T" type accountant where even when the systems are digital I still like to take a sheet of paper and work through entries with "T" accounts, its the only way to visualise how to correctly post items. I was planning to use Excel to post information in detail to be transferred to a summary P & L and balance sheet but after considering all the posts here I have decided to sort out an Epos till and suitable software before I start my bookkeeping. I am also going to delay registration for VAT until I have the software available to do the VAT return digitally.
Thank you all again for your valuable contributions.

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Replying to Galactus:
RLI
By lionofludesch
05th Mar 2024 12:26

Galactus wrote:

Hi DKB,
I have always been a basic "T" type accountant where even when the systems are digital I still like to take a sheet of paper and work through entries with "T" accounts, its the only way to visualise how to correctly post items. I was planning to use Excel to post information in detail to be transferred to a summary P & L and balance sheet but after considering all the posts here I have decided to sort out an Epos till and suitable software before I start my bookkeeping. I am also going to delay registration for VAT until I have the software available to do the VAT return digitally.
Thank you all again for your valuable contributions.

Yeah, I'm not against working out a T account on the back of an envelope for complicated transactions before posting a journal but I'd be thinking more of a van, bought on HP, VAT to claim, VED to post to motor expenses, part exchange old van, output tax to pay, repay HP balance.

As I understood your query, all you needed to do was work out the VAT on sales and move it to the VAT account.

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