MTD for VAT: Accounting software codesby
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.
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.
The table below shows the default settings for the most popular software products on the market.
|Zero rated supplies||0%||Zero rate||T0|
|Standard rated supplies||S (20%)||20%||T1|
|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.
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.
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.
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.
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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Jason has over 20 years’ experience working exclusively in indirect taxes (VAT, import duty, SDLT) with owner-managed businesses, corporates and not for profit sectors. He particularly enjoys challenging HMRC decisions, representing clients in tribunals or during inspections.
Experience includes land and property, partial exemption and...