Introduction

Client Responsibilities

In AIQ clients can record, manage, and report VAT (tax) data that conforms to Irish and UK legislation. However, full responsibility for interpreting the legislation lies with the user. Clients must ensure both the accuracy and completeness of data and the timeliness of VAT (tax) Returns to their respective tax authorities. 

VAT (tax) at the margins is complex (EU and Non-EU Goods and Services Trading) and subject to constant revision and varying interpretations depending on the country. In some cases, you may have to register for VAT in other EU countries and account for VAT there. Consequently, it is beyond the scope of AIQ to do other than provide the necessary tools for preparing returns. The ultimate responsibility to comply with legislation rests with the User Company.

See:

Value-Added Tax (VAT) (revenue.ie) 

Charge, reclaim and record VAT

Invoice vs Cash basis

The system allows for the recording and reporting of VAT (tax) on both the Invoice basis and the Cash basis according to UK and Irish rules respectively:

• Invoice Based:  The VAT (Tax) Return is based on the value of the VAT (tax) associated with Sales and Purchase Invoices (and Credit Notes).
• Cash Based (UK):  The VAT (Tax) Return is based on the VAT (tax) values associated with total Sales Receipts less total Purchase Payments.
• Cash Based (Ireland):  The VAT (Tax) Return is based on the value of the VAT (tax) associated with total Sales Receipts less the VAT (Tax) associated with Purchase Invoices (and Credit Notes).

Prerequisites

Set up Tax Codes

The client is responsible for correctly identifying and recording transactions against the appropriate tax rates relating to EU and non-EU Sales and Purchases. Ensure you set up the relevant codes with their associated rated rates in the system. 

1. Go to Setup > Codes Maintenance > General > Taxes. The Taxes screen may already contain data created during the setup of your first company.
2. Follow the instructions detailed under General Ledger Codes: Tax Codes.‍  

Set Up System Accounts

The GL Control Account Codes for VAT (Tax) hold respective tax transactions and balances. You can nominate them in the System Accounts table. 
 

1. Go to Setup > Codes Maintenance > General > System Accounts. It may already have the appropriate Sales and Purchase VAT (Tax) General Ledger Control Account Codes, included in the Company, General Ledger Codes, and Accounts templates used during setup.
2. To create or edit system accounts, follow the instructions under General Ledger Codes: System Accounts. ‍  

Allocate Tax Code defaults

AIQ uses Tax Codes extensively, especially in Sales, Purchasing, and Stock to apply the correct VAT (tax) to the relevant transactions. You can allocate a default Tax Code to any:

• Item: Follow the instructions to add Tax Code defaults to Items.. You can override any defaults at data entry stage.
• Customer or Supplier: Follow the instructions to add Tax Code defaults to Customers or Suppliers‍. These will take precedence over the Item default Tax Code but you can override it at data entry stage. 

See:

 European Commission, official website (europa.eu) 

11.7 Tax Reports - AIQ Academy

How do I use Code Maintenance to Control the Behaviour of the System?‍ 

How do I Maintain Customer Master Records?‍ 

How do I Maintain Supplier (Vendor) Master Records?‍ 

Reviewing Company Details & Settings and Defaults‍ 

Summary of the pre-supplied VAT (Tax) Rates 

Local Transactions

Local transactions are Sales, Purchases, and other transactions raised against Customers and Suppliers in your country. They can be both goods and services. Credit Notes are similar but will act negatively on the relevant boxes in your VAT (Tax) Return. 

The following is with reference to the UK VAT (Tax) Return layout as the legislation is common throughout the EU so should be equally applicable to other jurisdictions.

Sales of Goods and Services to Registered and Unregistered Customers: 

Use the Tax Codes V01 to V04 and V06 (also V11 to V14 and V16) in the standard pre-supplied VAT Rate table as appropriate for the tax rate of the goods or services in question. Transactions carrying these Tax Codes are directed to Box 1 and Box 6 of your VAT (Tax) Return.

Purchases of Goods and Services from Registered Suppliers: 

Use the Tax Codes V01 to V04 and V06 (also V11 to V14 and V16) in the standard pre-supplied VAT Rate table as appropriate for the relevant tax rate for the goods or services in question. Transactions carrying these Tax Codes are directed to Box 4 and Box 7 of your VAT (Tax) Return.

Purchases of Goods and Services from Unregistered Suppliers:   

These Purchase Transactions will not include VAT so use the Tax Code NT and tick Exclude. These transactions are outside the scope of UK VAT so you should not include them in Box 7 of your VAT (Tax) Return.

See:

  Send a VAT Return

Transactions with other EU Countries

Unlike Local Transactions, when trade involves the movement of goods (and any directly associated services, such as transport) between two VAT (tax) registered businesses in different EU countries, the Customer pays their home country rate. 

For example, if you sell to a Spanish Customer, do not charge VAT (tax) on your Invoice. Instead, they must self-administer an Acquisition Tax at the appropriate Spanish rate of VAT (tax) for the goods in question. Similarly, for purchases from another EU country, you must administer an Acquisition Tax Charge for VAT (tax) at the standard rate in your home country (UK or Ireland).  

See:

  VAT on movements of goods between Northern Ireland and the EU

Sales of Goods to Registered Customers:   

Use the zero-rated VAT (tax) Code, V05 in the standard pre-supplied VAT (Tax) table and tick ECS (European Community Sales). Transactions carrying this V05 VAT (Tax) Code are directed to Box 6 and Box 8 on the VAT (Tax) Return.

You must also show the Customer’s VAT Registration Number on your Invoice, including the two-letter country prefix. Check the VAT Registration Number for validity using the VAT (Tax) Information Exchange System (VIES).   

In the UK, in the case of goods and certain services supplied to EU-registered Customers, you must also submit, along with your VAT (Tax) Return, an EC Sales List.  

See:  

  Exports, sending goods abroad and charging VAT 

Sales of Goods to Unregistered Customers: 

Apply the appropriate tax rate for the goods in question as if the customer were local. However, do not tick ECS unless the sale exceeds the distance selling threshold for the country in question. 

Most sales in this category are treated as if they were local sales and directed to Box 1 and Box 6 of the VAT Return. You should not include them in Box 8. 

See:

  Exports, sending goods abroad and charging VAT

Purchases of Goods from Registered Suppliers:  

If you provided your VAT (Tax) Registration number to your Supplier with the two-letter country code prefix, your Supplier Invoice should state that the goods are zero-rated. However, you must pay Acquisition Tax. This means accounting for the VAT as if the VAT Invoice were from a local supplier. 

If ECP is ticked, use the relevant VAT (Tax) Code with the local rate. In the standard pre-supplied VAT (Tax) Table these are V05 and V15. Transactions with this Code are directed to Box 2, Box 4, Box 7, and Box 9 of your VAT (Tax) Return. 

See:

  Paying VAT on imports from outside the UK to Great Britain and from outside the EU to Northern Ireland

Purchases of Goods from Unregistered Suppliers: 

As the supplier is not registered for VAT (Tax), the Supplier Invoice will not contain any Tax Charge. Treat it as if it were a purchase from an Unregistered Local Supplier by using the Code NT. You do not need to record it in Box 7 or Box 9 of your Return.

Sales of Services to EU Customers: 

A transaction is outside the scope of UK VAT if the Place of Belonging is in the UK (supplier of the service) and the Place of Supply (receiver of the service) is in another EU country. For example, if an engineer travels from the UK to repair a machine in Germany, the transaction should carry the NT Code and have the Exclude checkbox ticked. 

However, electronically delivered services can complicate matters. Examples include:

• Web hosting
• Software supply and updating
• Distance Maintenance of Equipment or Software
• Distance Teaching
• Music and Video Downloads

HMRC provides the following guidelines that differentiates between business customers and consumers:

 

For VAT (Tax) Return purposes:

• If the Supply of Service is outside the scope of UK VAT, treat it the same as the Place of Supply being an EU country. 
• If the Supplier Accounts for UK VAT (Tax), treat it as detailed under Sales of Goods to Registered Customers in the EU and Sales of Goods to Unregistered Customers in the EU as detailed previously.

See:

  Work out your place of supply of services for VAT rules

Purchase of Services from EU Suppliers (Vendors): 

The rules are complex and can vary by country and type of service. 

If you have not been charged VAT (tax), it is best to Reverse Charges/PVA Service on UK VAT Returns‍ Reverse Charge the transaction according to the UK VAT Rules and treat it similarly to Purchases of Goods from Registered Suppliers (Vendors). Use Code V20 on the standard pre-supplied VAT (Tax) Table. The nett effect is that the charge will cancel out any tax liability when it is directed to Box 4 of your Return (in addition to Boxes 1, 6 and 7). 

If you have been charged VAT by your EU Supplier (Vendor) for the services provided to your UK Company, you may be able to reclaim this VAT (tax) from the VAT (tax) authorities of that country, but not from UK VAT (Tax). For the purposes of the UK VAT (Tax) Return, treat it as NT.

See:

  Paying VAT on imports from outside the UK to Great Britain and from outside the EU to Northern Ireland

  Reverse Charges/PVA Service on UK VAT Returns‍ 

  EU Reverse Charges on Irish Format VAT Returns‍ 

Transactions with Non-EU Countries

Sales of Goods and Services to Non-EU Countries: 

VAT is not charged on the transaction so it should carry a zero-rated Tax Code, such as V03 in the standard pre-supplied VAT Rate table. Do not use NT which is for out of scope transactions. This will ensure that the transaction is directed to Box 6 of your VAT (Tax) Return. 

See:

  Exports, sending goods abroad and charging VAT

Purchases of Goods from Non-EU Countries:  

VAT (tax) of purchases from non-EU countries is liable to VAT (tax) as if purchased locally in the UK. You can reclaim this VAT (tax) using Form C79. Treat these transactions the same as local Purchases of Goods and Services from Registered Suppliers and use the relevant Codes, V01 to V04 and V06 (also V11 to V14 and V16). This will ensure that transactions carrying these codes is directed to to Boxes 4 and 7 of your VAT (tax) Return. 

See:

  Paying VAT on imports from outside the UK to Great Britain and from outside the EU to Northern Ireland

Purchases of Services from Non-EU Countries:  

These transactions are the same as Purchase of Services from EU Suppliers detailed previously. 

See:

  Paying VAT on imports from outside the UK to Great Britain and from outside the EU to Northern Ireland

Excluded Transactions

Excluded transactions, also called Out of Scope transactions, are not the same as transactions already included on previous VAT returns. They should not be on your VAT (Tax) Return by their very nature. Examples include: 

• Business Rates
• Congestion Charges
• Fines
• Insurance Claims
• Loan Repayments
• MOT Fees
• Road Tax
• Water Charges

These transactions should carry the NT Code and have the Exclude checkbox ticked. Transactions carrying this VAT (Tax) Code will not appear anywhere on your VAT (Tax) Return.

How to Exempt Customers, Suppliers, Products, and Services

Some of your Customers and/or Suppliers (Vendors) may be exempt from VAT because of their size or special status. Goods or services, both bought or sold, can also be made exempt. 

See:

  Exemption and partial exemption from VAT

Step One: Set up an exempt tax code 

Set up a Tax Code‍ for use in these cases. Tick Exclude to ensure that transactions carrying this Tax Code are not included in the Gross Sales or Gross Purchases on your VAT (Tax) Return.

Step Two: Nominate Customers, Suppliers (Vendors), or Items as Exempt

1. Open the relevant Master Record.
2. Complete the following:
   • Customers/Suppliers: In the Finance Settings tab enter the Exempt Tax Code you just set up as the Default Tax Code. Tick Use Tax Code. This will ensure that the Tax Code is mandatory and not just a default. Any transactions raised against the selected Supplier (Vendor), or Customer will now carry this rate of Tax (0.00) and will not be included in the VAT (Tax) Return.
     
     
      
   • Items: In the Defaults tab, enter the exempt Tax Code. Normally, the VAT Code carried on the Item Master Record will override the Vat Code from the Supplier or Customer Master. However, if Use Tax Code was ticked in the Customer or Supplier Master Record, their codes take precedence.
     
     
      
3. Click Save. 

Expenses, Accommodation, Entertainment, or Bad Debts

See:

  Charge, reclaim and record VAT