Tax & VAT

Tax Codes and VAT Box Mapping

A tax code carries a VAT or sales-tax rate, the accounts the tax posts to, and which boxes of the VAT return each amount lands in. Every invoice line, bill line and journal line that involves tax names one. A finance team now maintains its own tax codes on the Set-up tab of Ledger & Finance, with the VAT return boxes chosen on the same form.

Where to find it

Admin Panel → Finance:

• Ledger & Finance — the Set-up tab, Tax codes section: add and change a company's tax codes and their VAT boxes

Architect Panel → ERP - Finance:

• Tax Codes — the codes as a datastore
• VAT Box Mapping — which return box each code's output tax, input tax and net amounts go to

Starting with the UK codes

Importing the UK small and medium business chart template on the Chart of accounts tab can add the UK VAT codes with it: S20 (Standard rate 20%), R5 (Reduced rate 5%), Z0 (Zero rated), EX (Exempt), OS (Outside the scope of VAT, on no return box) and RC20 (Reverse charge 20%, services from abroad), each pointing at the template's VAT accounts. Most UK companies need little more.

Adding or changing a tax code

1. Choose the company at the top and open Set-up. Under Tax codes press Add a tax code, or select a code to change it.
2. Enter the Code (up to 16 letters, digits, hyphens or underscores), the Description, the Jurisdiction (for example GB, NL or US-CA) and the Rate %.
3. Choose the Output tax account (sales) and the Input tax account (purchases).
4. Tick Input tax is recoverable if VAT on purchases under this code can be reclaimed. Untick it and the tax becomes part of the cost.
5. Tick Reverse charge (the buyer accounts for the tax) for services bought from abroad under the reverse charge.
6. Set Valid from and Valid to if the code applies only for a time.
7. Under VAT return keep UK default (output tax box 1, input tax box 4, net sales box 6, net purchases box 7; reverse charge also box 6), or choose Choose the boxes and tick the boxes for each amount. An amount with no box ticked is on no box, which is right for codes outside the scope of VAT or another country's tax.
8. Press Add tax code or Save changes.

Changing a rate

A code already used on posted lines keeps its rate, accounts and reverse-charge setting; the form says how many lines use it. Changing them would make old returns unexplainable. To change a rate, set Valid to on the old code and add a new code from the next day.

Company and group codes

A code belongs to one company, or to the whole group. A group-wide code applies to every company, so changing one needs write access to all of them. Where a company has its own VAT box mapping for a code, it replaces the group's mapping for that company.

What goes wrong

• "No tax codes, so documents are totalled with no tax" on the ERP Setup checklist: import the template's codes or add them.
• "The rate is a percentage, for example 20 or 8.875": enter the number without a percent sign.
• A chart account names a default tax code the company does not have: the Chart of accounts configuration check lists it. Add the code here, or clear it on the account.
• A box looks wrong on the return: check the code's VAT return setting before blaming the postings.

Worked example

A UK company starts buying software services from a US supplier. The template's RC20 already has Rate % 20, Reverse charge ticked and the UK default boxes, so the controller simply codes the bill with it: the net lands in boxes 6 and 7 and the tax in boxes 1 and 4. A Dutch subsidiary needs its own codes: on its company they add NL21 with Jurisdiction NL and choose no boxes, because the UK nine-box return does not apply to it.

Recommendations

• Start from the template's codes and add only what you trade under.
• End a code rather than editing it when a rate changes.
• Test one transaction per code and check it on a calculated VAT return before go-live.
• Keep non-UK codes off the UK boxes by choosing no boxes for them.

Preparing and Filing the VAT Return

The ledger prepares the UK nine-box VAT return from the tax codes on posted journal lines. You calculate a period, check and correct it, save it as a draft and then file it, which freezes the figures and stamps every line it counted so no line is ever counted twice. Nothing is sent to HMRC from here: you submit through your Making Tax Digital software and record its reference.

Where to find it

Admin Panel → Finance:

• Ledger & Finance — the VAT return tab: calculate, adjust, save, file and view returns

Architect Panel → ERP - Finance:

• VAT Box Mapping — which box each tax code's amounts land in

Preparing a return

1. Choose the company at the top and open VAT return. The period defaults to the last full quarter.
2. Set VAT period from and To, and press Calculate.
3. Read boxes 1 to 9. Box 3 is box 1 plus box 2; box 5 is box 3 less box 4, shown as To pay HMRC or To reclaim from HMRC; boxes 6 to 9 are whole pounds.
4. Select a box to see the journal lines behind it.
5. Read any Check warning above the boxes. It compares the net in boxes 6 and 7 with the net that boxes 1 and 4 imply for each tax code, and names a shortfall.
6. Press Save as draft return. The draft appears under Returns.

Which lines are counted

Every posted tax-coded line of the company's book dated on or before the period end that is not already on a filed return. A line dated in an earlier period but posted after that period's return was filed is counted as a late line: a missed invoice goes on the next return. A line that is irrecoverable VAT is a cost and is in no box.

Correcting box 6 or 7

When the VAT was right but a net amount is missing from box 6 (sales) or box 7 (purchases), for example a supplier bill whose net went to expense without a tax code, use Adjust box 6 or 7… (or the Adjust box button on a check, which fills the shortfall in). Give the Date (in an open period), the Box, the Tax code, the Net amount, the Account the net was charged to, optionally the supplier or customer, and What was missed (recorded). Press Post the adjustment. It posts a VAT journal of two lines on the same account, one carrying the tax code, so no balance and no VAT figure changes.

Filing

1. Submit the return through your MTD software. MTD data on the draft shows the return as the HMRC MTD VAT API expects it, for the HMRC period key you enter. It is shown, not sent.
2. Press File… on the draft and enter the Submission reference.
3. Leave Move the VAT this return counts ticked to post a VAT transfer journal from the VAT control accounts to the account with the VAT liability role, where the payment to HMRC clears it. Without that role the VAT stays on the control accounts.
4. Press File the return. Filing is final: the boxes are recalculated and frozen, and every line counted is stamped with this return.

The Returns list shows each return's period, status (draft or filed), box 5, line count, who filed it and its reference, and the VAT transfer journal. View shows a saved return's boxes.

What goes wrong

• "The draft return for … has not been filed, so its lines are counted here as late lines": file the earlier return first, then recalculate.
• A box is wrong for one tax code: check the code's VAT return setting on Set-up.
• The close check fails on VAT: no saved return covers the quarter end. Save at least a draft.

Worked example

For the quarter to 30 June the controller calculates the return. The check warns that box 7 is 2,400 short for S20: a supplier bill was posted to repairs without a tax code on its net line. They press Adjust box 7… (which fills in 2,400.00), choose the repairs account, name the bill, and post. After recalculating they save the draft, submit through the MTD software, file with the reference, and the VAT transfer journal moves the quarter's VAT to the VAT liability account.

Recommendations

• Calculate early and read the checks; a shortfall is far easier to explain before filing.
• File every return in order, so late lines land where they should.
• Give an account the VAT liability role so filing clears the control accounts.
• Record the submission reference exactly; it is the link to HMRC's receipt.