How to set up and use the Partial Exemption VAT scheme – Standard VAT

Summary

Note: This article only applies if you are using the Standard VAT scheme.

Companies should operate under partial exemption if they meet both of the following conditions:

  • They are VAT registered.
  • They purchase goods that include VAT then sell or use these goods to generate income that is classed as VAT Exempt.

You should use this article with VAT Notice 706 – VAT Partial Exemption. If you are using a Special Partial Exemption method, or the Standard Method Override applies, you should contact your local VAT office.

Throughout this article we use various VAT related words or phrases. For a definition of these, please refer to your VAT Guide or your local VAT office.

Note: Input VAT is used to describe VAT on purchases, for example, the VAT element on purchase invoices and bank payments. Output VAT is used to describe VAT on sales, for example, the VAT element on sales invoices and bank receipts.

Answer

  • To create a new nominal code
  • To create the partial exemption tax codes T6, T13 and T15
  • Tax codes to use on transactions
  • To calculate the total exempt Input VAT
  • To check against the De Minimis limit
  • To reclaim all of your Input VAT
  • To reclaim part of your Input VAT
  • To post the annual adjustment

To create a new nominal code

If you are using the Sage default nominal ledger structure we suggest you use the following nominal code. If you have already created this nominal code, please proceed to the following section To create the partial exemption tax codes T6, T13 and T15.

Nominal Code Name Management report Section of report
7950 Non Reclaimed VAT Profit and Loss Overheads
  1. Company > Nominal Ledger > Nominal Record.Sage Accounts 2012 and below – Company > Nominal Ledger > Record.
  2. Complete the details as follows:
    N/C Enter the nominal code number you want to create, for example, 7950.
    Name Enter the name of the account, for example, Non Reclaimed VAT.
  1. Save > Close.

You have created the new nominal code. You must now check the Chart of Accounts to ensure that the new nominal code is included. You should now configure the tax codes to use on your partial exemption transactions. For further information about this, please refer to the following section.

To create the partial exemption tax codes T6, T13 and T15

The following tax codes and settings are required:

Code Rate Include in VAT Return EC Code
T6 20% Yes No
T13 20% Yes No
T15 20% Yes No
  1. Settings > Configuration > Tax Codes.
  1. From the list of tax codes, select the required tax code > Edit.
  1. Complete the Edit Tax Code window as required > OK.Tip: For further information about the required tax codes, please refer to the table above.
  1. Apply > Close and if prompted to save changes > No.

Sage Instant Accounts v14 – Save > Close.

You have created your new tax codes and prepared Sage Accounts for partial exemption. You should now process your transactions ensuring that you apply the correct tax code to each transaction. For further information about this, please refer to the following section.

Tax codes to use on transactions

You should use the following tax codes when entering income and expenditure transactions under partial exemption.

Income transactions

Enter any income transactions, such as sales invoices or bank receipts, using the following tax codes:

T0 To enter zero rated transactions.
T1 To enter standard rated transactions.
T2 To enter transactions that are classed as exempt, but used in the partial exemption calculations.
T5 To enter reduced rate transactions.
T6 For items to be excluded from the calculation whether they are taxable or exempt. For example, the sale of capital goods, incidental real estate or financial transactions and self supplies.
T9 To enter transactions on which VAT is not applicable, for example, bank transfers.

Expenditure transactions

Enter any expenditure transactions, such as purchase invoices or bank payments, using the following tax codes:

T0 To enter zero rated purchases.
T1 To enter expenditure transactions that include VAT, for goods and services directly relating or attributable to your standard rated income.
T5 To enter reduced rate transactions.
T9 To enter expenditure on which VAT is not applicable, for example, wages.
T13 Use for all other expenditure on which VAT is charged, but can’t be reclaimed. Expenditure not relating or attributable to either vatable or exempt income.
T15 To enter supplier invoices that include VAT, for goods and services directly relating or attributable to your exempt income.

If you have not already created these tax codes, please refer to the previous section.

To calculate the total exempt Input VAT

Note: To calculate the annual adjustment figure, use the same calculation for the entire tax year, rather than the VAT period. For further information about this please refer to customs.hmrc.gov.uk

Calculate the non-related Input VAT (Figure A)

  1. Company > Manage VAT > VAT Return > calculate your VAT Return then click the figure in Box 4.
  2. Calculate the non-related Input VAT as follows:Non-related Input VAT (Figure A) = T13 Purchase Invoices – T13 Purchase Credits + T13 Payments + T13 Journal Debits
  3. Close.

Calculate the required percentage (Figure B)

  1. Click the figure in Box 6.
  2. Calculate the totals for T0, T1, T2 and T5 as follows:
  • T0 total = Sales Invoices – Sales Credits + Receipts + Journal Credits
  • T1 total = Sales Invoices – Sales Credits + Receipts + Journal Credits
  • T2 total = Sales Invoices – Sales Credits + Receipts + Journal Credits
  • T5 total = Sales Invoices – Sales Credits + Receipts + Journal Credits
  1. Using the above totals, calculate the required percentage as follows:
    Required percentage (Figure B) =

    (T0 + T1 + T5)

      x 100

    (T0 + T1 + T2 + T5)

    If the amount of non-related Input VAT (Figure A) is less than £400,000, round up the required percentage to the next whole number. If Figure A exceeds £400,000, round the figure up to two decimal places.

Calculate the non-recoverable element of the non-related Input VAT (Figure C)

Calculate the non-recoverable element of the non-related Input VAT as follows:

Non-recoverable non-related Input VAT (Figure C) = Figure A – (Figure A x Figure B)

For example, if the non-related Input VAT (Figure A) is £10,000, and the required percentage (Figure B) is 72%, the calculation is as follows:

Non-recoverable non-related Input VAT = 10,000 – (10,000 x 72%) = 10,000 – 7,200 = 2,800

Calculate the Input VAT related to exempt supplies (Figure D)

  1. Click the figure in Box 4.
  2. Calculate the Input VAT related to exempt supplies as follows:Input VAT related to exempt supplies (Figure D) = T15 Purchase Invoices – T15 Purchase Credits + T15 Payments + T15 Journal Debits
  3. Close.

Calculate the total exempt Input VAT (Figure E)

Calculate the total exempt Input VAT as follows:

Total exempt Input VAT (Figure E) = Non-recoverable non-related Input VAT (Figure C) + Input VAT related to exempt supplies (Figure D)

You have now calculated the total exempt Input VAT. You should now compare this to the De Minimis limit to determine if you can reclaim all of your Input VAT. For further information about this, please refer to the following section.

To check against the De Minimis limit

If your total exempt Input VAT (Figure E) is less than the De Minimis limit, you can reclaim all of your Input VAT.

The De Minimis limit is:

  • Not more than £625 per month on average and
  • Not more than half of your total Input VAT in the period.

If the total exempt Input VAT for the period is below the De Minimis limit, relief is available and all of your Input VAT is recoverable. If all of your Input VAT is recoverable, please refer to the following section To reclaim all of your Input VAT.

If the total exempt Input VAT for the period is above the De Minimis limit, relief is not available, which means that only part of your Input VAT is recoverable. If only part of your Input VAT is recoverable, please refer to the section To reclaim part of your Input VAT later in this article.

To reclaim all of your Input VAT

Recalculate the VAT Return. The figures that appear are the correct values for the period.

Once the VAT liability has been agreed, click Reconcile then post the VAT transfer journal as usual.

You have now reclaimed all of your Input VAT under partial exemption. Under this scheme, you are also required to make an annual adjustment. For further information about this, please refer to the section To post the annual adjustment later in this article.

To reclaim part of your Input VAT

  1. Company > Manage VAT > VAT Return > calculate your VAT Return for the required period.
  2. Adjustments > in the Box 4 Adjustment column, click the drill button.Tip: The F3 function key performs the same action.
  3. Complete the VAT Manual Adjustments window as follows:
    Reason Enter the reason for the adjustment, for example Reduction for Partial Exemption VAT irrecoverable.
    Adjustment Reduce the value by the amount of the total exempt Input VAT (Figure E).Note: As the box value is to be reduced, prefix the figure with the minus sign.
  1. Save > Close.
  2. Once the VAT liability has been agreed > Reconcile then post the VAT transfer journal as usual.
    Note: The amounts to transfer are those that appear on the VAT Return before entering any adjustments.
  3. Company > Journal Entry.Sage Accounts 2012 and below – Company > New Journal.
  4. Complete the Nominal Ledger Journals window as follows:
    N/C Name Details T/C Debit Credit
    2204 Manual Adjustments Irrecoverable VAT T9 0.00 Total exempt Input VAT (Figure E)
    7950 Non Reclaimed VAT Irrecoverable VAT T9 Total exempt Input VAT (Figure E) 0.00
  5. Save > Close.

You have written off the non-reclaimable portion of your Input VAT. Under this scheme, you are also required to make an annual adjustment. For further information about this, please refer to the following section, To post the annual adjustment.

To post the annual adjustment

  1. Company > Manage VAT > VAT Return > calculate the VAT Return that needs to include the annual adjustment.
  2. Adjustments > in the Box 4 Adjustment column, click the drill button.
  3. Complete the VAT Manual Adjustments window as follows:
    Reason Enter the reason for the adjustment, for example Partial Exemption annual adjustment.
    Adjustment Enter the value that the box should be adjusted by.Tip: If you have over claimed VAT, the value should be reduced and you must prefix the figure with the minus sign.
  1. Save > Close.
  2. Once the VAT liability has been agreed > Reconcile then post the VAT transfer journal as usual.Note: The amounts to transfer are those that appear on the VAT Return before entering any adjustments.
  3. Company > Journal Entry.Sage Accounts 2012 and below – Company > New Journal.
  4. Complete the Nominal Ledger Journals window as follows:
  • If you have over claimed VAT, post the following journal:
    N/C Name Details T/C Debit Credit
    2204 Manual Adjustments Annual adjustment T9 0.00 Amount of VAT over claimed
    7950 Non Reclaimed VAT Annual adjustment T9 Amount of VAT over claimed 0.00
  • If you have under claimed VAT, post the following journal:
    N/C Name Details T/C Debit Credit
    2204 Manual Adjustments Annual adjustment T9 Amount of VAT under claimed 0.00
    7950 Non Reclaimed VAT Annual adjustment T9 0.00 Amount of VAT under claimed
  1. Save > Close.

You have now accounted for the annual adjustment.

For further advice or technical queries

Please contact us on:

01603 516350

enquiry@mintmis.com

www.mintmis.com

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