The explanations and advice in this article are based on Wave’s understanding of relevant HMRC publications. While we’ve taken reasonable care in researching and preparing this article, Wave will not be liable for any loss or liability arising from errors or omissions. For certainty in managing your sales tax reporting obligations, and other regulatory obligations in the UK, we recommend that you consult a qualified UK-based accountant or tax professional, and refer directly to HMRC publications and guidance.
There are different requirements for tracking VAT on purchases and sales within the UK and within the rest of the EU. Here's how to track everything in Wave.
Track VAT on UK sales
Each time you make a sale to a customer in the UK, you will need to apply the appropriate sales tax to your transaction.
If you create an invoice for your customer, select the correct sales tax for each line item within the invoice. You can set each line item to a different VAT code if necessary.
If you receive an income item without issuing an invoice, apply VAT on the income transaction in Wave. Note that the amount of an income transaction is entered inclusive of tax.
If your sale comprised items at different VAT rates, split the transaction and apply the correct tax to each part of the split. Do not apply multiple different tax rates to a single income transaction.
Track VAT on UK purchases
Each time you record a purchase from a supplier in the UK, you will need to apply the appropriate sales tax to the transaction.
If you receive and record a bill from your supplier, select the correct sales tax for each line item within the bill. You can set each line item to a different VAT code if necessary.
If you record an expense directly into Wave without having first entered a bill (including when you import expense information directly from a linked bank account), add the appropriate sales tax to calculate the net and tax amounts.
Due to rounding differences when your supplier calculated VAT, there may be a small difference between the VAT calculated by Wave and the VAT on your supplier’s receipt. You should always adjust the VAT amount to match your receipt or other document/record.
If your expense consists of items at multiple tax rates, use the same method you would use to handle VAT for an income transaction with multiple VAT rates. Split the transaction and apply the correct VAT rate to each part of the split.
You are not allowed to deduct and claim VAT on certain purchases, for example business entertaining, and should apply the "NR" (non-recoverable) VAT code to these. It is your responsibility to understand and correctly apply the VAT rules for what you can and cannot reclaim.
Flat Rate Scheme
If your business uses the Flat Rate Scheme for VAT, you do not need to apply any VAT code to UK purchases, with the exception of certain capital purchases over £2,000 including VAT, on which you may be able to reclaim VAT at Standard or Reduced rates as applicable. See VAT Notice 733 for additional information about the Flat Rate Scheme, and when VAT may be reclaimed on capital purchases.
Track VAT on sales to the EU
Sales to customers in the EU are treated differently according to whether the customer is a business or a consumer.
Sales to businesses may be made without VAT, but you are required to carry out due diligence to ensure that your customer is a bona fide business, registered for sales tax in its own country. You must ask your customer for their sales tax registration number, and you are expected to check to ensure this is valid.
VAT Notice 725 sets out detailed rules that determine the VAT treatment of EU sales, and it is your responsibility to understand these and apply them correctly. Special rules apply to certain categories of goods, and to certain methods of distribution. The method and timing of the physical export of goods may also affect their VAT treatment.
Once you have determined:
- that your customer is a bona fide business in the EU and registered for sales tax in its own country; and
- that the nature of your supplies and the method and timing of their sale and export render them eligible for supply without VAT
you can create an invoice and apply the appropriate VAT code.
If you have set up your codes according to our instructions on how to set up VAT, you will apply:
- ECG: If the sale consists of goods (which may include incidental services supplied on an inclusive basis with and at the same time as the sale of goods); or
- ECS: If the sale consists of services
If you have determined that your customer is an individual consumer, or a business not registered for sales tax in its own country, you should apply the same VAT code that you would when providing the same supply to a customer in the UK.
Your invoice for each sale without VAT to an EU business must identify the customer, their business address and country, your VAT number, and your customer’s sales tax registration number.
The Sales Tax regime and VAT reporting requirements for EU trade are complex. We strongly recommend that you contact an accountant or another specialist advisor in the UK if your business engages in trade with the EU.
Track VAT on purchases from the EU
In the same way that you are able to make supplies to businesses in other EU countries without charging VAT, suppliers in other EU countries can also make supplies to you without charging their equivalent of VAT.
Where you make relevant purchases from EU suppliers and receive these without sales tax applied, code them with the appropriate VAT code: ECG for goods, and ECS for services. You will also need to directly calculate Reverse Charge VAT on the transaction and record this via a journal transaction. Read our instructions on preparing your VAT return for more detail about this process.
As with sales to EU business customers, there are many special cases that you are responsible for understanding and applying. Consult a professional and refer to VAT Notice 725 to ensure you are correctly following the regulations.