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Zero rated VAT Purchase transactions appearing in Box 7 on VAT Return

We have just had a VAT inspection as a result of continued large differences between the VAT declared in Box 3 and the VAT worked out on the total of Box 7 on the VAT return . It appears that the zero rated VAT purchase amounts are being added to the total in ( box 7), ie Wages, Bank Charges etc. What are we doing wrong.

Zero rated items do appear on box 7. To completely exclude such items from the VAT return you need to mark them as “Out of Scope”.

Dear Glenn

Thank you for your prompt reply much appreciated, Just to recap, by removing thesetransactions ‘as out of scope’ I trust that they will still appear in the main accounts and it is just the VAT return thatthey are excluded from.

Many thanks

That’s exactly right!

Hi Glenn
Sorry to be banging on about the same subject.

Once you have tagged a supplier as ‘out of scope’ will this not set all future transactions with this supplier automatically as ‘out of scope’ and stop all transactions from appearing in Box 7 on VAT return. ie staff wages to the same supplier weekly. Surely you do not have to change every invoice manually for that supplier.

Thank you again for your time

Kind regards - Carlton

Once you set a supplier as having Out of Scope invoices, it would reveal a check box on the invoice entry screen that would allow you to mark the invoice as Out of Scope. It is on a per invoice basis yes, it needs to be like this as there are cases where you can have some invoices marked as Out of Scope and some in scope for UK VAT.

Just to expand on this point, which I missed earlier. You shouldn’t be attributing wages to invoices, they aren’t invoiced expenses in a business. Bank charges are also zero rated, not Out of Scope (AFAIK) so they would typically show on box 7.

There really are limited cases where items are marked completely Out of Scope for UK VAT. But wages definitely shouldn’t be on your VAT return.

Hi, just picking up on this old conversion, I have input some invoices and have found non-VAT items (e.g. one is an export to the U.S.) appearing in box 6 of the VAT return (net sales/outputs).

I realised that I had not ticked the Out of Scope box in the customer record. I then did this but the incorrectly reported sales are still reported.

Is this because this change does not work retrospectively? If so, what is the best way to stop these numbers going on the VAT return?

Thanks, Richie

Hi @richiekk

That’s correct - any changes made would only affect new invoices from that point forward.

This option shows the VAT options on an invoice (out of scope etc). You would need to go into the individual invoices and make sure the boxes are ticked there too.

Just got back to this. Many thanks for the response

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Hi, I am just picking up on this old conversation because I have just started using QuickFile for my company. I am quite impressed so far. However, I do have some issues with the VAT Return functionality.

According to HMRC, VAT Return boxes 6 and 7 should include both Exempt and Out of Scope supplies / purchases. I have previously reported these (before using QuickFile) and I need to continue to do so. However, I realise that some people are in the opposite situation and they want to continue to exclude Exempt and Out of Scope items (even though it is wrong). Would a suitable compromise be to include Exempt but to exclude Out of Scope items?

To make this workable, you would need to add an Exempt tick-box (in addition to the existing Out of Scope tick-box) to the sales invoice entry screen and the purchase entry screen.

On a similar but separate point, bank charges should be included in box 7, as these are zero-rated. Most people don’t bother creating purchases for bank charges. Typically, these banking entries are simply auto-allocated to the Bank Charges expense account.

The solution is for any entries in this account that are not matched to a purchase to be included in box 7 by the VAT Return calculator. Otherwise, users will either have to enter a purchase for each bank charge or manually calculate and adjust each VAT Return. Neither of these options is good.

Hi @Timothea,

There are a few discussions in regards to the treatment of exempt and out of scope supplies and acquisitions here.

We have two flags you can apply to your invoices, “Exempt” and “Out of Scope”, in each case applying these flags to your supply or acquisition invoices will exclude the totals from the VAT return (boxes 6/7 respectively). When a zero rate is applied the totals will be included.

This is something we have been looking into, however there are specific items that should not be included on boxes 6/7 and some of our users will have marked these as exempt. So with that in mind any change would need to be released as an update to our VAT procedures, this can then be knowingly applied by the user.

This should be happening already, if you zero rate an item it will be included in box 7. In QuickFile our VAT procedures are tied to invoices rather than nominal ledgers. From your bank statement you need to tag to a purchase invoice, this however is very quick, you can either bulk tag (50 items at a time) or even setup an automated tagging rule.

Hi Glenn,

Thank you for your quick reply.

Regarding whether Exempt or Out of Scope supplies or acquisitions should be included in the VAT Return (boxes 6 or 7, respectively) clearly, in the vast majority of cases, Exempt and Out of Scope supplies or acquisitions should be included in VAT Returns because that’s what HMRC says. However, I understand the need to ensure that existing users are not adversely affected.

This could be achieved by creating four additional VAT Settings to control, in each case, whether Exempt or Out of Scope supplies or acquisitions are included in VAT Returns. The default value for each setting would be OFF, to ensure that there is no change to the current VAT treatment unless a user turns on one or more of the new settings.

At the moment, I have to either enter Exempt and Out of Scope invoices and purchases as zero-rated or manually adjust each VAT Return, neither of which is ideal.

Regarding the bank charges issue, I use the auto-tagging rules, but I still have to enter each purchase separately, which is what I wanted to avoid. Is there a way to create each purchase automatically (entering only the Supplier Reference) when auto-tagging bank charges?

I’d disagree that most out of scope supplies or acquisitions need to be included on your VAT return within boxes 6 and 7. For acquisitions the guidance states to leave such supplies out of box 7, in regards to box 6 it depends on place of supply rules. Out of scope in this context means out of scope of UK VAT, so it would seem sensible to have a control within the software to allow for exclusion. When it comes to exempt items then I would agree that it would likely be better to default to include these items.

Before we make any significant changes to our VAT return procedures (which is already the most complex area of our system) we would rather wait to see what changes will be proposed during the Brexit negotiations. It should also be noted that boxes 6 and 7 are for stats only and will have no net tax effect. Of course it’s better to get these totals as closely aligned to HMRC guidance as we can but these boxes are already the subject of much debate, if you Google it you will see quite a few differing opinions.

With auto-tagging you can have the purchase invoice created automatically when the bank reference is partially matched. Something like this should work.