VAT refund for VAT-Exempt sale

We sell a medical product at, which is VAT-Exempt but only if bought by a customer with a permanent disability or long term illness. Otherwise it is rated as standard. The vast majority of users are coping with a short-term injury.

Customers order through the website and are charged VAT, which they pay as part of the cost of the item, via Paypal. If they are disabled, they complete a form tio declare and I refund the VAT element of the sale as a Paypal refund. What my bookkeeper seems unable to do is to categorise this payment as 100% VAT. How should she proceed?

She mailed me the following

"I have tried to post it directly or produce a credit note on the ‘PayPal sales’ account which you cannot do either. I have tried to post it to manual adjustments and journal it into the VAT due on purchases account but then it does not show up on the VAT report we would use to submit VAT.

I am sorry to say I am stumped at this one, I don’t think the package provides you with the facilities you are now needing as your company is growing in a different way e.g. VAT exemptions."

I am reluctant to move to another system and hope you can guide us on how to process this refund (which happens in a tiny number of cases)

Hi @BearProducts

Just so I’m clear on this - you charge the VAT on the sale, but in some cases you would need to refund this VAT to the customer (effectively meaning they purchased the item with no VAT)?

If this is the case, you would have the original invoice at 20%, like this for example:

What you would then need to do, is to credit the invoice for the VAT (in this case, the £5). Go to More Options > Credit Note, and you would then create a 2 line credit note for this adjustment:

You have one line that shows the item being refunded at 20% VAT, and then another line which is for the full value at no VAT. This would generate a credit note for just the VAT (in this case £5). This would be reflected on the original invoice:

The VAT report would then show £0.00 VAT being due:

I hope that helps?

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