No VAT – These transactions will not appear on your VAT returns. This code should be used on transactions outside the scope of VAT.  Examples are transfers between bank accounts, tax payments to HMRC, drawings/dividends by directors/shareholders.

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Exempt – This should only be used where your business makes exempt supplies. Where you make an exempt supply (e.g. selling an insurance policy), you should be invoicing with “Exempt Income” and no VAT should be charged.  Any expenses directly related to the supply of exempt goods/services need to be marked as “Exempt Expenses” and no VAT claimed, even if there was VAT on the expense. Examples include Bank charges, postage stamps, rent (unless VAT is specifically charged), insurance and DVLA road tax.

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Zero Rated Expenses – This is used where the supply of goods is Zero rated, such as children’s clothes, basic foods, books and newspapers. If your supply is Zero rated, use “Zero Rated Income”. If an expense was Zero rated or the supplier was not registered for VAT, use “Zero Rated Expense”.

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20% & 5% – These are the Standard and Reduced VAT rates that are used in the UK. Most supplies fall under the Standard 20% category but the Reduced VAT rate of 5% is used for the supply of energy in some circumstances (and for certain food sales and for certain construction projects).  If making a VAT-able supply, use “20%/5% (VAT on Income)”.  If you have been charged VAT on expenditure and it is not directly related to an Exempt supply, use “20%/5% (VAT on Expenses)”.

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Reverse Charge Expenses (20%) – Some suppliers of services are based outside the UK.  For many of these services, the suppliers don’t register for VAT in the UK and so don’t charge VAT.  Instead, you as the customer have to apply the reverse charge rules.  Receipts or invoices received may have a note on them along the lines of “This supply has been made under the reverse charge scheme”.  But either way, please use “Reverse Charge Expenses (20%)”.

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Domestic Reverse charge – If the domestic reverse charge applies to your business (i.e. you are in the construction industry), you should use the ‘Domestic Reverse Charge @ 20% (or 5% if relevant) VAT on income)’ code for sales invoices raised. If you incur expenses covered by the domestic reverse charge then you should use the ‘Domestic Reverse Charge @ 20% (or 5% if relevant) VAT on Expenses’ code.

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Reduced rate of VAT 12.5% – Relevant for hospitality, holiday accommodation and attractions from 1st October 2021 – 31st March 2022 you will need to set up a new default VAT rate within Xero. Select Accounting, then Advanced. Select tax rates, click new tax rate. Enter the display name and select a tax type (sales or purchases). Add the tax component name and enter the VAT percentage and click save. From 1st April 2022 this returns to the standard rate of 20%.

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Import/export of goods – If you are a company for which this applies please seek our bespoke advice. But, generally speaking:

• For purchase of goods from inside and outside the EU use Zero Rated Expenses (to ensure the net purchase value reaches box 7 of your VAT Return)

• If UK Customs charges you VAT before releasing the goods then they'll do so by issuing a Certificate C79. Use that certificate to reclaim the VAT and use Xero VAT code VAT on Imports.