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How does Tax Treatment impact your VAT Return?

Tax Postings in Sage Financials

‘Tax Breakdown’ is the key to how VAT is handled in Sage Financials. In a previous article I went over how Tax is configured in Sage Financials, so let’s look at how Tax Breakdown works when you process invoices.

Each Invoice Line Item has a Tax Treatment and a Tax Code. These two are combined to work out the Tax Rate. As you enter Line Items, Sage Financials sums together the different Tax Rates and creates the Tax Breakdown:
In this example four line items result in two Tax Breakdown records.

When you Post the Invoice you generate a Ledger Entry, Ledger Items and Ledger Entry Tax Breakdown records:

And it is the Ledger Entry Tax Breakdown records that are used to populate the boxes on your VAT Submission form and reports.

Reverse Charge

When purchasing from the EU or purchasing goods from outside the EU, the Reverse Charge rules apply. In Sage Financials this is handled by creating two Tax Breakdowns:

The net effect on your VAT Liability is zero, but it allows Sage Financials to fill in Box 2 and Box 4 correctly.

Tax Treatment and your VAT form

It is perhaps worth revisiting the definitions HMRC use for the 9 VAT Boxes:

  • Box 1: VAT due in the period on sales and other outputs
  • Box 2: the VAT due in the period on acquisitions from other member states of the EU
  • Box 3: total VAT due
  • Box 4: VAT reclaimed in the period on purchases and other inputs (including acquisitions from the EU)
  • Box 5: net VAT to pay to HMRC or reclaim
  • Box 6: total value of sales and all other outputs excluding any VAT
  • Box 7: the total value of purchases and all other inputs excluding any VAT
  • Box 8: total value of all supplies of goods and related costs, excluding any VAT, to other EU member states
  • Box 9: total value of all acquisitions of goods and related costs, excluding any VAT, from other EU member states

Each Tax Treatment can effect different VAT Boxes as show:

Tax Treatment Box 1 Box 2 Box 4 Box 6 Box 7 Box 8 Box 9
UK Sale Goods/UK Sale Services Tax Net
EC Sale Goods UK/EC Sale Services UK/General Export Net Net
UK Purchase Goods/UK Purchase Services Tax† Net†
EC Purchase Goods UK Tax† Tax† Net† Net†
EC Purchase Services UK/UK Import of Services Tax† Tax† Net† Net†
UK Purchase in Reverse Charge Tax† Tax† Net†
UK Import of Goods Net†

† Reverse Charge creates two Tax Breakdowns for each Tax Rate: one negative with a Tax Code Dimension Tag ending in ‘.Output’ and one positive ending in ‘.Input’. This means the net Tax is zero, but only the positive ‘.Input’ rates are used in the VAT Submission.

VAT Reporting

Sage Financials provides several VAT reports, including EC Sales List which you may be required to submit, along with other reports to help you check you VAT. There is also a VAT Details report, but you may find this does not display the detail you are really after. There can be a miss-match between the reports & the VAT Submission, but the VAT Submission is the one to trust. Get in touch if you are having issues with this.

Alpha Index have developed a plugin that creates a more complete detail report, showing the VAT Breakdown for each Invoice Item. You can download a free trial here.

Download the VAT Detail Report Plugin

This is not advice

This material is provides as a general guidance for informational purposes only. Accordingly, the publisher does not provide advice. The use of this material is not a substiture for the guidance of a lawyer, tax or compliance professional. When in doubt, please consult your lawyer, tax, or compliance professional for counsel.

Coming up next:

In the final article on Sage Financials & Tax, I will look at which Tax Treatments you can use for different transactions.