Understand VAT rates
Learn more about the VAT rates used in Accounting and how to set up defaults to reduce errors.
There are five pre-set VAT rates to choose from. Simply choose the appropriate VAT rate for your transaction.
When the VAT rates change or a new VAT rate is required, we create and maintain the rates for you.
Available VAT rates and when they are used
Depending on what you buy or sell, there are several different VAT rates which might apply.
To keep things simple, we set up and update the VAT rates for you. Simply choose the appropriate VAT rate for your transaction.
The VAT rates we use listed below with a brief description of some the items they apply. This is not a definitive list. Check out the HMRC website for full details of how VAT should be applied.
Standard. This is used for most transactions. Currently 20%.Standard VAT rate is used for
Crisps and savoury snacks
Soft drinks and mineral water
Electricity - businesses (in some cases 5%). Gas - businesses (in some cases 5%).
eBay seller fees
Lower rate. This is also called Reduced rate. Currently 5%. Used for some goods and services, such as children’s car seats and home energy.Lower rate VAT is used for
- Mobility aids for the elderly
- Smoking cessation products - nicotine patches and gum
- Electricity - charity, domestic and residential
- Gas - charity, domestic and residential
Zero Rated. Currently 0%. Used for certain goods and services such as most food and children’s clothes.Zero-rate is used for
children’s clothes and footwear,
books and newspapers.
Exempt– for transactions exempt from VAT, such as postage stamps, financial and property transactions. The net amount still appears on your VAT Return.Exempt is used for
- Property, land and building sales
- Some finance charges
- Education and some training
- Betting and gaming
- Burials and cremation
- Postage and packing such as stamps
No VAT – for transactions not involving VAT. These don’t appear on your VAT Return.VAT is not charged for
- Bank or cash transfers
- PAYE and NI contribution
- Loans, dividends and gifts of money
To help you choose the correct VAT rates when you record your sales and purchases, check out our VAT rate guide.
Difference between zero rate and exempt
Zero-rated is for items where the Government charges VAT but the rate is currently set to zero. This includes items such as children’s clothes and footwear, water, basic foods, books and newspapers.
Exempt items is for items where no VAT is paid or charged, but which still need to be recorded on the VAT Return. This includes items such as land, postal services, health services, betting and gaming.
Custom VAT rates
You cannot create your own custom VAT rates.
If you are using a sub-scheme for VAT, where the VAT is calculated differently to the Standard 20%, then you need to
Select the Standard rate
Amend the VAT value on the transaction to the correct amount.
How VAT rates appear on the VAT return
This table shows which boxes on the VAT Return are affected by these rates:
|VAT rate||Sale or purchase||Net or VAT||Box|
|Lower Rate||Sale||Net||Box 6|
|Zero Rated||Sale||Net||Box 6|
|No VAT||Non-vatable rate. The transaction doesn’t appear on the VAT Return.|
If you purchase goods or services from VAT registered suppliers in the EU, the following also applies:
- Reverse charge VAT - The VAT element of purchases of standard or lower rated services appear in Boxes 1 and 4 and the net in 6 and 7.
- Notional VAT - The VAT element of purchases of standard-rated goods appear in Boxes 2 and 4 and net in 7 and 9.
Change the VAT rate on a ledger account
Each ledger account holds a default VAT rate to save you from having to select the correct rate each time you use it. It's simple to change the default.
Note: Changing the default rate won't make any change to existing transactions. They'll remain with the rates set at the time of their creation.
- Select Settings, then Business Settings, then Chart of Accounts.
- Use the search to find the ledger account to change.
- Select the required ledger account.
- Choose the VAT rate to use from the VAT Rate drop-down.
VAT rates in Sage 50
If you have moved to Sage Accounting fro Sage 50 Accounts, here is a list