When recording outgoing transactions in your bookkeeping system, it’s essential to distinguish between zero rated, exempt, and outside the scope items for VAT purposes. Although none of these involve VAT being charged, they are treated differently within the calculation for the VAT return. Misclassifying these items can lead to inaccuracies in Box 7, which reports the total value of purchases excluding VAT. Ensuring the correct VAT treatment helps maintain accurate records and supports compliance with HMRC requirements.
Outside the scope
Outside the scope transactions for VAT purposes are those that fall completely outside the UK VAT system. This means they are not subject to VAT at all, and you do not include them on your VAT return.
Common examples are grants and donations, salary payments, payments to HMRC, dividends and payments of loans.
When recording such items in Xero you should use the rate “No VAT”, other bookkeeping systems may use the rate “n/a”. This will mean that these transactions are not included Box 7.
Exempt items
Common exempt items are insurance, Royal Mail postage services, rent (assuming no option to tax), education and vocational training supplied by recognised bodies, bank charges and interest, membership subscriptions to professional bodies. This is not intended to be the complete list and further details can be found VATA 1994, Schedule 9.
When recording such items in Xero you should use the rate “Exempt Expenses”. Exempt transactions are still included within Box 7.
Zero rated items
If your receipt/ invoice does not show VAT, and it is not an item covered in the sections above, then you should record this in Xero using the rate “Zero Rated Purchases”, other bookkeeping systems may simply use the rate “0%”. Any items recorded in this way will then be included within the total purchases (box 7) figure for the period.
Common items that are always zero rated are most food (some exceptions), books, public transport (excluding taxis and private hire) and children and protective clothing.
Blocked input tax
There are some cases that even when input tax (VAT on purchases) has been charged it is not recoverable. Common examples of these are business entertainment, cars that are available for private use and lease cars available for private use (50%).
You should record these items without VAT in the same way as the zero rated items.
Remember you must have a VAT invoice to support any input tax (VAT on purchases) claim. If you do not have this, you should not be reclaiming the VAT.
If you would like to discuss this in more detail relating to your business, please feel free to book a free online meeting.
