Different kinds of VAT Transactions

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	Introduction			One of the problems even experienced book-keepers encounter, is trying to decide how to analyse and describe certain types of supplies made or received for VAT purposes. Should the supply be treated as zero rated, exempt, reduced rate (5%) or standard rated (17.5%)? Spotting when the VAT standard rate applies to supplies rarely gives problems. The most likely types of transactions that can cause confusion to people new to VAT, include: Income and expenditure that is outside the scope of VAT Supplies that are normally standard rated, but come from suppliers who are not registered for VAT Zero-rated supplies Exempt supplies Supplies from overseas Reduced rate (5%) for domestic power supplies To help you come to grips with the basic rules of accounting for VAT, the sections below give examples of the typical transactions new book-keepers tend to have trouble with deciding how they should be treated. The lists are not intended to be exhaustive, and are only intended to give broad guidelines to follow. If you have any doubts about how to account for VAT on a particular transaction, then please contact us, or the Customs and Excise help line on 0845 010 9000. This applies particularly to any overseas transactions. It is better to be safe than sorry.
	Outside the scope of VAT			These typically crop up when you try to analyse out the transactions listed in your bank statement or cash book. The following items are outside the scope of the VAT regulations, and you should never account for VAT in respect of them. Salary payments Cash transfers between bank accounts Capital introduced and drawings of a proprietor or partner Capital introduced and drawings of a director against his or her director's loan account Payment of dividends Payment of any tax liabilities
	Non VAT-registered Suppliers			The obvious answer for dealing with such transactions is to treat it as a standard-rated supply, but just having a 'zero-value VAT' element. If you use accounting software, then you may care to consider creating a new VAT category for this kind of transaction. The reason being is that one of the internal control accounting checks you can carry out at the end of any VAT reporting period, is to extract the net standard rate supplies and multiply by 17.5%. The answer should come within a few pence (rounding differences) of the reported standard rate VAT amount. The value of this test is undermined if you have entered a material number of 'zero-VAT' entries from non-registered traders. By creating a separate VAT analysis group for this kind of supply from non-registered traders, removes the problem of diluting the standard rated figures. The control check will then work as intended.
	Zero rated supplies			Typical zero-rated supplies include: Food (raw or unheated) Sewerage services Transport - ferries, train and air fares Childrens' clothing and footwear Protected buildings and construction of certain kinds of buildings Drugs and medical supplies, including aids for the handicapped Books Caravans and houseboats
	Exempt supplies			The typical exempt supplies include: Finance charges, including bank account charges Insurance Postal services Betting, gaming and lotteries Land sales Educational services Health and welfare Trade union and professional bodies Charitable fund raising events Sports and sport competitions Works of art
	Supplies from Overseas			When goods are imported into the UK from outside the EC, VAT is normally due at the same rate as on the supply of those same goods in the UK. The duty is payable at the time you import the goods. Under certain circumstances you can apply to defer the duty payable. Goods received by a VAT registered business in the UK, from a VAT registered supplier in another EC member state will be treated as a zero-rated supply in the country of origin, and subject to VAT in the UK. As the recipient, you effectively calculate the VAT due on the supply as if it had been made in the UK, and add the amount to the output VAT liability describing it as "VAT due on acquisitions". Provided the goods are used for business purposes, you are also able to deduct an equivalent amount of input VAT, describing it as "VAT deducible on acquisitions". One entry effectively cancels the other out. If you receive a range of defined services from abroad listed in Schedule 5 to the Value Added Tax Act 1994 (see list), the services are treated as if you had supplied them. In other words you must account for output VAT on these services. The value of the services is treated as taxable turnover, and should be taken into account when considering if a business should be registered for VAT because its turnover is about to exceed the annual limit of £55,000. Dealing with the treatment of VAT on imported and exported goods and services is a complex matter. For this reason always seek professional advice to avoid making any costly errors.
	Reduced rate (5%) for domestic power			Mentioned only because gas and electric supplies to small businesses should be checked to confirm whether the reduced rate is being applied for low volume supplies.