With so many of us transferring from Sage Desktop to Xero Online, its easy to forget the Tax Codes and meanings.  Here are a few basic rules to help you.

Tax Rules on XERO:

If you want it shown on the VAT Return @ 0% – T0 – Zero Rated Expenses or Exempt Tax

If you want it excluded from VAT Return – T9 – No Tax

  • If you don’t want sales tax to be included at all on your transaction, you need to use ‘No Tax’ (rather than ‘Tax Inclusive’ or ‘Tax Exclusive’). Specify this each time you create a transaction using the ‘Amounts are’ option on invoices or uncheck the ‘Include tax’ check box on bank transactions and journals.
  • If your transaction is set to ‘No Tax’, Xero determines that you do not want this transaction included in any tax reporting and therefore the tax rate column or field will not be editable and the transaction will not be included in the calculation of your total sales or purchases figures on the VAT Return for the period.
  • Alternatively, if you mean that your transaction is reportable but incurs no VAT (i.e. VAT is 0%) then you should leave your overall tax treatment as ‘Tax Inclusive’ or ‘Tax Exclusive’ and choose an appropriate tax rate that doesn’t attract VAT – in the case of UK VAT, this will be sales or purchases tax rates that are ‘Zero Rated’, ‘Exempt’ or your own sales or purchases rates that have VAT of 0% (see below for exactly which rates are reported in each box on the Return).
  • As it happens, transaction amounts set to ‘No VAT’ also fall outside of the scope of VAT as determined by HMRC and as such will not be included in the VAT Return calculations at all i.e. where all line items on a transaction are set to ‘No VAT the whole transaction will not be included in the total sales/income and purchases/expenses figures on your Return. If ‘No VAT’ is used on one of many line items, then just that portion of the transaction will be excluded.
  • Transactions that are ‘No Tax’ overall or transactions that have line items set to ‘No VAT’ will still be listed on the VAT Audit report (in the ‘No VAT’ section) as being transactions that occurred in that period. You can use this as a useful reference when checking that all the transactions you expect to be included in your VAT Return totals have been correctly accounted for.
  • Remember, if you need a transaction to be reported on your Return yet it does not have a VAT component, make sure you choose a tax rate that doesn’t attract tax (e.g. ‘Zero Rated Income’, ‘Zero Rated Expenses’ etc) rather than choosing that the transaction be ‘No Tax’ and excluded from the Return calculations altogether.
Box 1 – VAT on sales and other outputs
  • ‘VAT on Income’
  • Your own rates with the tax type ‘Sales’
  • Acquisitions from the EC are not included.
  • Note: VAT from transactions that use your own custom rate of type ‘EC Sales’ are not included, even if you have applied a percentage to this rate. The total value of these transactions is reported at Box 8. If you want VAT to be reported here in Box 1, use ‘VAT on Income’ or your own tax rate or type ‘Sales’.
Box 2 – VAT on EC Acquisitions

The VAT portion of transactions in the period that use an EC tax rate set up by you with a type of ‘EC Purchases’. The figure will be included in the total VAT calculation boxes (3 and 5). If you’ve not set up your own tax rate of this type, no VAT will be included in this box.

Box 4 – VAT on purchases and other inputs (including acquisitions from the EC)
  • ‘VAT on Expenses’
  • Your own rates with the tax type ‘Purchases’
  • Your own rates with the tax type ‘EC Purchases’
  • It also includes the EC VAT that you paid on imports from EU countries i.e. your own tax rate with the tax type ‘EC Purchase’
  • ‘VAT on Imports’
  • Please note that the ‘VAT on Imports’ tax rate should be used with the VAT account to code transaction line items that are 100% refundable – the whole amount coded to this tax rate will be included in Box 4 for inclusion in you VAT Refund/VAT to Pay total.
Boxes 6 and 7 – Sales and purchases excluding VAT
  • ‘VAT on Income’
  • ‘Zero Rated Income’
  • ‘Zero Rated EC Income’
  • ‘Exempt Income’
  • Your own rates with the tax type ‘Sales’
  • Your own rates with the tax type ‘EC Sales’
  • Your own rates with the tax type ‘Exempt Sales’
  • ‘VAT on Expenses’
  • ‘Zero Rated Expenses’
  • ‘Zero Rated EC Expenses’
  • ‘Exempt Expenses’
  • Your own rates with the tax type ‘Purchase’
  • Your own rates with the tax type ‘EC Purchase’
  • Your own rates with the tax type ‘Exempt Purchase’
Boxes 8 and 9 – EC Supplies and purchases excluding VAT
  • ‘Zero Rated EC Income’
  • Your own rates with the tax type ‘EC Sales’

For more information, please get in touch with some @ADJBusiness