A VAT code (sometimes called a tax rate or tax code in software) tells the ledger how much VAT a transaction includes and which VAT return boxes it belongs in. Choose the wrong code and the return is wrong, even if every figure was typed correctly.
The codes most businesses need
| Code | Rate | Typical use | Return boxes |
|---|---|---|---|
| Standard | 20% | most goods and services | box 1 or 4, and box 6 or 7 |
| Reduced | 5% | domestic fuel and power, children’s car seats, some energy-saving materials | box 1 or 4, box 6 or 7 |
| Zero-rated | 0% | most food, books, children’s clothing, exports of goods | box 6 or 7 only |
| Exempt | none | insurance, most financial services, postage under the universal service, some property | box 6 or 7 only |
| Outside the scope | none | wages, dividends, VAT payments, grants, donations, internal transfers | no boxes |
| Reverse charge (services) | 20% | services bought from overseas suppliers | box 1 and box 4, box 6 and box 7 |
| Domestic reverse charge (construction) | 20% | CIS construction services between VAT-registered businesses | supplier: box 6 only; customer: box 1, 4 and 7 |
| Postponed import VAT | 20% or 5% | goods imported using postponed VAT accounting | box 1 and box 4, box 7 |
| Import VAT (C79) | the VAT shown | import VAT paid at the border | box 4 only |
Zero-rated, exempt and outside scope are not the same
All three show no VAT on the invoice, but they behave differently:
- Zero-rated supplies are taxable at 0%. They count towards the VAT registration threshold and the business can reclaim input VAT on related costs.
- Exempt supplies are not taxable. They count in box 6, but input VAT on costs relating to them may be restricted under partial exemption.
- Outside the scope items are not supplies at all and appear nowhere on the return.
Using “zero-rated” for wages or loan repayments overstates boxes 6 and 7; using “exempt” for zero-rated sales can trigger an unnecessary partial exemption calculation.
Choosing a code for purchases
- Is there a valid VAT invoice addressed to the business? If not, no input VAT can be claimed, whatever the receipt shows.
- Is the VAT blocked? Client entertainment and most cars bought for private use do not allow recovery.
- Was the supplier overseas? For services, the reverse charge code; for goods, import VAT or postponed VAT.
- Is the cost mixed use? Apportion or use a partial code where the software supports it.
Bank feed rules and defaults
Software lets you set a default code per supplier and per nominal account. Defaults save time but are the most common source of repeated errors: one rule that posts every Amazon purchase at the standard rate will reclaim VAT on books and on marketplace items with no VAT invoice. Review default codes when a new supplier is added and at least once a year.
Codes and VAT schemes
Under the flat rate scheme, the codes still record the nature of each sale, but the VAT due is calculated as a percentage of gross turnover and input VAT is not reclaimed (except on certain capital assets). Under cash accounting, the codes are the same but the return picks up transactions when paid. The scheme is set at company level; the codes do not change.
A quarterly check
Before each return, run a VAT report by code and look for:
- standard-rated purchases with no VAT invoice attached;
- large items coded outside the scope;
- reverse charge entries with only one side posted;
- any new code someone has created.
For the ledger accounts behind the codes, see VAT control accounts; for the return itself, how to complete a VAT return.