VAT Director Rayner Essex
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VAT return

MTD for VAT: Accounting software codes

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To help you prepare for the extension of MTD to all VAT registered businesses, you need to understand when to use the different VAT codes in cloud or desk-based accounting software.

15th Sep 2021
VAT Director Rayner Essex
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MTD for VAT will be extended to all VAT registered businesses from 1 April 2022, as set down in Statutory Iinstrument 2021/986, which was published at the beginning of September.

Even if you use a spreadsheet, the correct treatment of all VAT transactions is vital to ensure full compliance.

VAT Codes

The table below shows the default settings for the most popular software products on the market.

VAT Rate

QuickBooks

Xero

Sage

Zero rated supplies 0% Zero rate T0
Standard rated supplies S (20%) 20% T1
Exempt supplies Exempt Exempt T2
Reduced rated supplies R (5%) 5% T5
Outside Scope of VAT No VAT/OTS No VAT T9
Reverse charge Services RC SG (20%)  Reverse Charge (20%) T22 (sales)T24 (purchases)
Postponed Import VAT  PVAT Z (0%)PVAT    (20%) VAT on Imports T18 -postponedT19 –not postponed
Domestic Reverse Charge(for construction services) 5% RC CIS20% RC CIS Domestic RC 5%Domestic RC 20% T26 (5%)T21 (20%)
Northern Ireland ECG 20% - goodsECG   0% - goods Zero Rated EC ExpenseZero Rated EC Goods T7 (0% purchaseT8 20% purchase

Outside the scope

Outside the scope of VAT has more than one purpose. Salaries, loans and bank interest are not supplies for VAT purposes and such transactions should not appear on the VAT return. The accounting software uses a specific VAT code for these transactions (T9/No VAT/Outside Scope).

But some transactions are “outside the scope of VAT” but do need to be recorded on the VAT return.  If the business purchases reverse charge services from overseas, these invoices are without VAT, but fall under the reverse charge procedure whereby you treat the invoice as both a purchase and a sale, declaring output (box 1) and input tax (box 4) on the VAT return, as well as populating boxes 6 and 7.  So use the reverse charge code in the accounting software to ensure correct treatment applies.

Likewise, a business may make supplies of services to non-UK business customers, the VAT treatment of “sales of services to overseas businesses” is outside the scope of UK VAT, but we still need to record the sale on the VAT return (box 7, sales excluding VAT).

HMRC Notice 700/12 at paragraph 3.7 details what transactions should go in box 6 and that paragraph notes: “supplies which are outside the scope of UK VAT as described in place of supply of services (VAT Notice 741A)” should be included in Box 6.

Reverse charge

It is common to see reverse charge services coded as zero rated, which is a logical, but try to use the codes recommended by the accounting software, to ensure consistency.

Postponed VAT

For postponed VAT accounting (PVA), each system is a little different, usually requiring manual adjustment. The tax code for PVA in QB/Sage Online posts the net to box 7, and the VAT equivalent to boxes 1 and 4. However, some invoices will be for duty and VAT only with a separate invoice for the goods imported, so an additional line with the net amount as a negative may be required to zero down the net, to then leave just the VAT and relevant duty as payable. There may be other solutions, this is just one example.

Summary

HMRC and cloud software suppliers promote how MTD will make everything simpler and more compliant. But that glosses over the fact that there is still a certain level of required knowledge in order to correctly code and account for sales and purchases in the accounting system.

I hope this little guide will help.

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Jason Croke will be speaking at AccountingWEB Live Expo on 1-2 December 2021 alongside such guests as Rebecca Benneyworth, Peter Rayney, Paul Aplin, Anita Monteith, Carl Reader, Steve Collings, Reza Hooda plus representatives from HMRC. 

AccountingWEB Live Expo takes place on 1-2 December 2021 at Coventry Building Society Arena, Coventry. Registration is now open. A full content programme will be announced in early October enabling you to register for specific sessions. Please visit the AccountingWEB Live Expo website for full details and to sign up to our newsletter.

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Replies (29)

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By Hugo Fair
15th Sep 2021 12:47

"HMRC and cloud software suppliers promote how MTD will make everything simpler and more compliant. But that glosses over the fact that there is still a certain level of required knowledge in order to correctly code and account for sales and purchases in the accounting system."

I love the use of 'glosses over' ... it was a sad day Jason when you decided not to enter the Diplomatic Corp!

Thanks (3)
Replying to Hugo Fair:
Jason Croke
By Jason Croke
16th Sep 2021 09:37

I did actually used to work for the Home Office many moons ago, perhaps my lack of diplomacy explains why I'm no longer a civil servant.

Thanks (1)
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By AdShawBPR
16th Sep 2021 09:21

Thank you for this Jason. Isn't VAT on Imports in Xero for use where VAT is paid separately to the freight company when the goods have been imported. PVA is done through an adjustment to the VAT return...

Thanks (0)
Replying to AdShawBPR:
Jason Croke
By Jason Croke
16th Sep 2021 09:53

Let me check with my colleague and if needs be I'll update the article so that we have a reliable guide for the future.

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By GDavidson
16th Sep 2021 09:26

The codes changed on the 1st April 2021. Sage never got round to telling anyone but I don't know about other software companies. There must have been thousands of companies who sell and buy to and from the EU who put in incorrect returns.

Thanks (1)
Replying to GDavidson:
Jason Croke
By Jason Croke
16th Sep 2021 09:51

There is more than one way to do things, I've seen some clients not bother with any codes and just add manual journals/adjustments and if the VAT return is correct and MTD compliant then I guess it doesn't really matter, but it is why I thought it'd be useful to try and put all the codes in one place.

If there are more codes that are useful or if there is another way to do it (ie, manual journals, not using codes for those with Excel) then we can share those ideas here if we want to, so that we have a real-life guide of how to do this thing called VAT & MTD.

Thanks (0)
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By lh3f9764bg1g
16th Sep 2021 09:31

As we only use spreadsheets and bridging software . . . . . surely we don't need to worry about this gumph? Do we?

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Replying to lh3f9764bg1g:
Jason Croke
By Jason Croke
16th Sep 2021 09:46

No, you don't need to worry about the codes if you're using Excel.

Thanks (0)
Replying to Jason Croke:
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By lh3f9764bg1g
17th Sep 2021 09:54

Phew!

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Replying to lh3f9764bg1g:
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By L Haldane
16th Sep 2021 10:20

Yes, SO much easier with spreadsheets.

No need for confusing vat codes, just head up the spreadsheet columns with sensible headings in plain english that everyone can understand and keep the exempt column totals out of your VAT return summary. E.g. who wouldn't understand what to post into a column entitled 'Insurance, rent & rates'

It's also relatively quick and easy to spot where a client has posted something into the wrong column on a spreadsheet, but can take hours to trawl through the endless report screens in an accounting software package to esure everything is in the correct place.

Our clients love the simplicity of the spreadsheets we tailor to their individual business needs and very little ever goes wrong. So for us its a no-brainer. You can keep your accounting packages and their perpetual monthly subscription fees !

Thanks (1)
Replying to L Haldane:
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By lh3f9764bg1g
17th Sep 2021 10:00

Hopefully in the future when MTD ITSA is approaching certainty people will share their spreadsheets. I'm certain there will be many great examples. I'm with you - spreadsheets are the bull's pizzle. I don't EVER want to move away from them. The fact that they are easily understood and the fact that they are easily changed - that's what makes them more suitable. Who wants to go around the houses in a software package trying to change an entry from one thing to another - whilst not being able to see behind the Wizard of Oz's curtain to see the gubbins of bookkeeping software. The way I see it . . . . . . the only likely possible that any of these packages could bring would be the bank feeds. Simple bank feeds (and only that) at a reasonable price is about as far as, I think, I'll be prepared to go.

Thanks (0)
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By J B Murray
16th Sep 2021 10:07

As a user of Sage Line 50 cloud we were instructed to use T21 for reverse charge transactions and it seems to work. Where did you get T22 and T24 ?

Thanks (1)
Replying to J B Murray:
Jason Croke
By Jason Croke
16th Sep 2021 11:26

https://gb-kb.sage.com/portal/app/portlets/results/viewsolution.jsp?solu...
T21 is for domestic reverse charge for construction services but works equally for normal reverse charge services (20%).

Thanks (0)
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By piotrkosa
16th Sep 2021 10:36

Thank you for this Jason. Is anywhere better description what should be included in box 6? I'm trying to find if eg sales of goods located in the Germany to other UE customer should be included? I assume not in the same way as supplies which are outside the scope of UK VAT as described in Place of supply of services (VAT Notice 741A)

Thanks (0)
Replying to piotrkosa:
Jason Croke
By Jason Croke
16th Sep 2021 11:30

There was a link in the article above, but here it is again, it details what goes in each Box.
https://www.gov.uk/guidance/how-to-fill-in-and-submit-your-vat-return-va...

Goods in Germany going to another EU destination does not go no the UK VAT return, because if you own those goods in Germany, you need a German VAT registration.

Thanks (1)
By ireallyshouldknowthisbut
16th Sep 2021 10:41

I must admit we have given up worrying about anything other than box 5 as software makes it much harder and clients tend to use it all very badly and post all sorts of random VAT codes.. HMRC no longer seem to do the reconciliations from accounts to the reported turnover and they have never had a hope in hell of checking box 6.

So long as box 5 is right the worst you are going to get is a ticking off.

Exotic topics such as reverse charge and all the rest of it are about 5 miles over most of our clients heads.

Thanks (2)
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By catk1
16th Sep 2021 11:07

Hi Thanks for this. On your point on supplies of services to non-UK business customers (ie outside and inside Europe) what code should be used in Xero to ensure the transaction appears in box 7?
Thanks a lot

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By Paul Crowley
16th Sep 2021 12:58

Much appreciated
I still have clients that only enter transactions that have VAT charged

Thanks (1)
Replying to Paul Crowley:
Morph
By kevinringer
16th Sep 2021 13:29

Ditto. And some of mine are farmers so box 6 has been £nil for many years, yet HMRC never question it and continue to pay out the refunds.

Thanks (1)
By Charlie Carne
16th Sep 2021 14:42

This is a very useful chart; thank you, Jason. I would just add that, in QBO, there are different reverse charge codes for sales (0.0% RC) and purchases (20.0% RC SG). The software very sensibly only offers the relevant RC code for a sales or purchase item, so you cannot use the wrong one.

To make life much easier for clients on QBO, the accountant can go to the "Manage rates" screen (from Taxes - Edit VAT - Edit rates) and un-tick all of the codes that that client does not need. These will not then be offered in the VAT drop-down options when creating a transaction.

Thanks (1)
Replying to charliecarne:
Jason Croke
By Jason Croke
16th Sep 2021 15:07

Thanks for the feedback and an excellent tip with regard ticking/hiding the codes not required, keep things simple is my motto!

Thanks (1)
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By flightdeck
16th Sep 2021 16:02

Excellent article. Thank you

Thanks (0)
RLI
By lionofludesch
17th Sep 2021 07:27

Just the new codes for 12.5% VAT to deal with now.

Thanks (0)
Replying to lionofludesch:
Jason Croke
By Jason Croke
17th Sep 2021 11:18

FFS :)

I only started doing VAT because it was supposed to be a simple tax!

Thanks (0)
Replying to Jason Croke:
RLI
By lionofludesch
17th Sep 2021 12:33

Jason Croke wrote:

FFS :)

I only started doing VAT because it was supposed to be a simple tax!

[chuckle]

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By Chris Pittock
18th Sep 2021 17:11

Is what you say under PVA correct? Under PVA there won't be an invoice for VAT from the Agent.

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By Chris Pittock
18th Sep 2021 17:11

Is what you say under PVA correct? Under PVA there won't be an invoice for VAT from the Agent.

Thanks (0)
Replying to Chris Pittock:
Jason Croke
By Jason Croke
20th Sep 2021 12:00

Hi Chris, yes for Xero it's a bit messy as there is more than one way it can be done and doesn't quite fit the simple table i was trying to go for.

https://central.xero.com/s/article/Adjust-the-amounts-on-a-VAT-return#Ad...

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RLI
By lionofludesch
04th Oct 2021 12:27

Jason - time to update the list for the new 12½% Halfway House Rate (does it have a proper name?)

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