VAT & VAT return

In the UK there are several methods for dealing with VAT:

  • Standard scheme
  • Cash scheme
  • Flat Rate VAT (FRV) scheme - standard
  • Flat Rate VAT (FRV) scheme - cash

Using Brightpearl you can generate a VAT return for the Standard or Cash scheme. If you are on the FRV then the values can be manually adjusted to get the VAT return figures at your reduced rate.

Setting up tax

Brightpearl comes preset with the tax codes and rates generally used in the UK. Check your tax codes at Settings > Localization > Tax codes. More tax codes can be created as needed.

Tax codes are built up from tax components which represent the rate, this structure allows for tax to be set up for other countries such as the US where the total tax rate on a tax code is made up of several separate rates.

Tax zones and countries are used to define which tax code should be assigned to an order when it is downloaded from a sales channel. This is done by recognising the country of the order and assigning the tax code from the zone into which that country falls. For example, a tax zone for Europe can be assigned a tax code of T4, the country of France is in Europe and so any downloaded orders from France will be assigned the T4 tax code.

How to create tax components

  1. Go to Settings > Localization > Tax components.
  2. Click the Add a new tax component button.
  3. Enter a name for the component, e.g. the city or state name.
  4. Enter the rate applicable for this component.
  5. Click the Save button.

How to create a tax code

  • Go to Settings > Localization > Tax codes.
  • Click the Add a new tax code button.
  • Enter the tax code and a name.
  • Select the tax components (rates) applicable to this tax code. The total is displayed.
  • Click the Save button.

Your code is ready to be used.

How to add a tax zone

  1. Go to Settings > Localization > Tax zones.
  2. Click the Add tax zone button.
  3. Enter a name for the tax zone.
  4. (Optional) Select a tax code applicable to this tax zone. Leave it blank to use the product tax code.

How to create countries

  1. Go to Settings > Localization > Countries.
  2. Click the Add country button.
  3. Enter the country name, ISO codes - 2 and 3 digits and the dialling code.
  4. Select the tax zone applicable to this country.
  5. Ensure it is set to active.

Using tax codes

Tax codes can be used for any transaction, but it is important to recognise that some codes have a specific purpose:

T4 is for EU sales

T8 is for taxable EU purchases

T9 is for non-taxable EU purchases

All other tax codes can be used for any transaction. The type of transaction will dictate how the VAT is reported:

  • Purchases, purchase credits and bank payments will all report purchase taxes.
  • Sales, sales credits and bank receipts will all report sales taxes.

Tax codes on downloaded orders

When an order is downloaded from a sales channel it will use the Tax Rules to decide which tax code should be assigned to each order row. The Tax Rules will use the following details to calculate which tax code should be assigned to an order row:

  1. Customer

    If the customer has a tax code it will be assigned to the order. If they do not have a tax code then the following things are considered.

  2. Country

    If the order country falls within a tax zone, the tax code from the zone will be assigned to the order. If there is no tax zone, or the tax zone has no tax code, then the following things are considered:

  3. Product

    If the item on the order can be linked with a product record, that tax code from the product will be assigned to the order row. If no product record can be linked, a misc item is created and the company default for your account will be assigned.

Note that the value used on the order may be that calculated by Brightpearl, or that from the sales channel. Please refer to your developer or channel documentation

Accounting for VAT

Brightpearl will automatically post the accounting for VAT for all transactions. The accounting for tax is the same for all VAT schemes. If you are on the FRV scheme then an additional and manual accounting correction will need to be made to periodically, which will make the adjustments for your reduced VAT rate.

VAT accounting will automatically affect the following nominal codes:

  • 2200 Sales Tax Control Account

    All sales type transactions with VAT will be posted to this code, these are journal types SI, SC, BR.

  • 2201 Purchase Tax Control Account

    All purchase type transactions with VAT will be posted to this code, these are journal types PI, PC, BP.

  • 2202 VAT Liability

    This code will be used when the VAT return is marked as reconciled and the 2200 and 2201 are cleared down for the period, it uses a JJ type journal.

Note that Sales Receipts (SR), Purchase Payments (PP) and Bank Transfers (BT) are always assigned tax code T9 Not Rated and therefore will not record any VAT amounts or show on the VAT return unless the journals are manually edited.

Making adjustments for FRV rates

Once you have run your VAT return, you will need to make an adjustment to your accounting for that period. We highly recommend you seek accounting advice on how the journal should be entered and for what value.

How to run a VAT return

  1. Go to Reports > VAT Return.
  2. Select dates as shown on your paper VAT Return.
  3. Choose whether to include reconciled transactions in the current period. Transactions that have already been reconciled for VAT using the VAT Return page. The normal setting for this option should be no.
  4. Choose whether to include unreconciled transactions prior to the chosen period. The normal setting for this option should be yes. This will include transactions with a date during any previous VAT period that have been entered into your accounts since the last VAT report was produced.
  5. Choose whether to display a detailed report.
  6. Click Submit to show you VAT return figures.
  7. Copy the numbers to your paper VAT Return. If you are using FRV you will need to convert the figures to your flat rate and post and adjusting journal.
  8. It's a good idea to display and print a copy of the detailed report for your records before you reconcile the VAT transactions.
  9. Click the  Reconcile VAT Return button to mark all the included transactions as reconciled for the tax period.

Marking the VAT return as reconciled will post a JJ type accounting journal to clear down the 2200 Sales Tax Control account and 2201 Purchase Tax Control account and increase 2202 VAT Liability account with the amount owed to the HMRC for the tax period.

How to account for FRV differences

  1. Go to Reports > VAT return.
  2. Run your VAT return for the relevant period (with Show detail turned on)
  3. Select all of the data on screen and copy to Excel
  4. In Excel, you will need to use the formulas below to find the totals you need for the journal:

Box 1: Total Sales x FRV rate percentage

Box 3: Sum of Boxes 1 and 2

These totals will help with the adjustment value you need for your journal - seek your Accountant's help before posting a journal.

Flat rate VAT can be calculated based on either Invoices or Payments; so you could alternatively do the following:

Invoices : Export sales report to calculate totals needed for adjustment journal
Payments : Export your bank activity report to calculate totals needed for adjustment journal

How to enter a journal

  1. Go to  Accounting > Enter Journal.
  2. The date defaults to today's date, to post to a prior date you can change it. The date must be an open accounting period.
  3. Use the Details section to write a reason for the journal; really useful if you need to investigate the changes down the line.
  4. If you're posting entries to nominal codes Accounts Receivable (1100) or Accounts Payable (2100) always enter a Contact ID to connect the entry it to a customer or supplier account.
  5. On the first row select the nominal account for the entry and then enter the amount in either the Debit or Credit column.
  6. If tax is applicable on the value select the Tax Code. By entering a tax code the value will appear as a balance on your Sales/Purchase Tax report.
  7. Continue to enter journal lines, click the Add Row button to add more lines.
  8. When the total debits = total credits click Save Journal to post it to accounts.

The journal will immediately update the relevant accounts.

VAT return

The VAT return in Brightpearl is built by reading accounts journals. The VAT return boxes affected by transactions depends on the nominal code and the tax code used in the journal.

Nominal code Any tax code T4 T7 or T8 T9
2200 Box 1 Box 1 - -
2201 Box 4 - Box 2, 4 -
Sales 4000-4999 Box 6 Box 8 - -
Non-sales, not 4000-4999 Box 7 - Box 7, 9 -

When processing transactions in Brightpearl the relevant nominal codes and tax codes will automatically be recorded on the accounting journal so that the VAT return reports the correct figures. Here is how you can expect different transactions to be reported on the VAT return:

      Special tax codes  
Transaction Type Tax control nominal Any tax code T4 for EU sales T7 or T8 EU purchases T9
Sales invoice (SI) 2200 Box 1, 6 Box 1, 8 - -
Sales credit (SC) 2200 Box 1, 6 Box 1, 8 - -
Sales receipt (SR) By default these are not taxable journals and are assigned T9  
Bank receipt (BR) with sales code 2200 Box 1, 6 Box 1, 8 - -
Bank receipt (BR) with non-sales code 2200 Box 1 Box 1 - -
Purchase invoice (PI) 2201 Box 4, 7 - Box 2, 4, 7, 9 -
Purchase credit (PC) 2201 Box 4, 7 - Box 2, 4, 7, 9 -
Purchase payment (PP) By default these are not taxable journals and are assigned T9  
Bank payment (BP) with non-sales code 2201 Box 4, 7 - Box 2, 4, 7, 9 -
Bank payment (BP) with sales code 2201 Box 4 - Box 2, 4 -
Bank tranfer (BT) By default these are not taxable journals and are assigned T9  

How to run a VAT return

  1. Go to Accounting > VAT Return.
  2. Select dates as shown on your paper VAT Return.
  3. Choose whether to include reconciled transactions in the current period. Transactions that have already been reconciled for VAT using the VAT Return page. The normal setting for this option should be no.
  4. Choose whether to include unreconciled transactions prior to the chosen period. The normal setting for this option should be yes. This will include transactions with a date during any previous VAT period that have been entered into your accounts since the last VAT report was produced.
  5. Choose whether to display a detailed report.
  6. Click Submit to show you VAT return figures.
  7. Copy the numbers to your paper VAT Return. If you are using FRV you will need to convert the figures to your flat rate and post and adjusting journal.
  8. It's a good idea to display and print a copy of the detailed report for your records before you reconcile the VAT transactions.
  9. Click the Reconcile VAT Return button to mark all the included transactions as reconciled for the tax period.

Marking the VAT return as reconciled will post a JJ type accounting journal to clear down the 2200 Sales Tax Control account and 2201 Purchase Tax Control account and increase 2202 VAT Liability account with the amount owed to the HMRC for the tax period.

Reconciling your VAT return

When you are happy with the numbers that display on your VAT Return, print 2 copies then click the Reconcile VAT return button. A journal will be created to transfer the VAT payable from your sales and purchase tax nominal codes into your VAT liability account. This will mark each transaction included in the return as reconciled. Once a transaction has been reconciled for VAT you will not be able to change it. It is good practice to ensure that all Brightpearl bank records have been reconciled with the bank statements for the VAT period first to reduce the chance of errors.

How to run a VAT return

  1. Go to Accounting > VAT Return.
  2. Select dates as shown on your paper VAT Return.
  3. Choose whether to include reconciled transactions in the current period. Transactions that have already been reconciled for VAT using the VAT Return page. The normal setting for this option should be no.
  4. Choose whether to include unreconciled transactions prior to the chosen period. The normal setting for this option should be yes. This will include transactions with a date during any previous VAT period that have been entered into your accounts since the last VAT report was produced.
  5. Choose whether to display a detailed report.
  6. Click Submit to show you VAT return figures.
  7. Copy the numbers to your paper VAT Return. If you are using FRV you will need to convert the figures to your flat rate and post and adjusting journal.
  8. It's a good idea to display and print a copy of the detailed report for your records before you reconcile the VAT transactions.
  9. Click the Reconcile VAT Return button to mark all the included transactions as reconciled for the tax period.

Marking the VAT return as reconciled will post a JJ type accounting journal to clear down the 2200 Sales Tax Control account and 2201 Purchase Tax Control account and increase 2202 VAT Liability account with the amount owed to the HMRC for the tax period.

Paying your VAT

If you owe money to HMRC use a bank payment to record the payment from your bank account, posting it directly to the VAT liability account. The amount paid should be the balance of the VAT liability account leaving an overall balance of zero after the payment has been processed.

If you are receiving money from HMRC use a bank receipt to record the payment into your bank account, posting it directly to the VAT liability account. The amount received should be the same as the balance of the VAT liability account, leaving the overall balance as zero after the payment have been processed.

To check the balance of the VAT liability account, view the Trial Balance.

Viewing previous VAT returns

You can view the transactions that have been included on previous returns by opening Reports > More > VAT History from the main menu.

Why is my VAT return incorrect?

You are responsible for ensuring that all of your VAT returns are submitted correctly. If you suspect there is an error, then it is recommended to review all journals included in that return via Reports > VAT return history. You should also seek advice from your Accountant.

Standard scheme

The VAT return will include tax postings made using the following journal types:

  • SI & SC

    Only sales (4000-4999), purchase (5000-5999) and tax control accounts (2200 & 2201) will be included in the VAT return.

  • PI & PC

    Only sales (4000-4999), purchase (5000-5999) and tax control accounts (2200 & 2201) will be included in the VAT return.

  • BR

    Excludes postings to purchase nominal codes (5000-5999).

  • BP

    Excludes postings to sales nominal codes (4000-4999).

  • JJ

    JJ journals were previously not included in the VAT return. Due to changes in version 4.60 JJ journals created on or after 1st January 2014 will now be included, and any JJ journals dated prior to this will be excluded. 

Journal types SR and PP are always excluded from the VAT return. Transactions made using these journal types would not normally be assigned tax codes.

A journal row value (depending on the journal type as stated above) will be included on the VAT return where the row has been assigned a tax code. In this image row 1 and 2 have a tax code of T20 and will therefore be shown in the relevant boxes of the VAT return:

Jnl_tax_codes

The following rules are applicable to rows in JJ journals which are assigned a tax code:

  • For a sales nominal code (4000-4999) the full amount is included in Box 6 of the VAT return. A credit will increase box 6 and a debit will decrease box 6 (Sales).
  • For the sales tax control account (2200) the full amount is included in Box 1 of the VAT return. A credit will increase box 1 and a debit will decrease box 1 (Sales tax).
  • For any nominal code which is not sales (i.e. 1-3999 and 5000-9999) the full amount is included in Box 7. A debit will increase box 7 and a credit will decrease box 7 (Purchases).
  • For the purchases tax control account (2201) the full amount is included in Box 4 of the VAT return. A debit will increase box 4 and a credit will decrease box 4 (Purchase tax).

Changes for JJ journals dated 1st January 2014 onwards

Prior to version 4.60 JJ journals were always excluded from the VAT return, even where the journal rows were assigned tax codes. JJ journals are generally system created journals where tax was not applicable. However, where a manual journal was entered this would also be excluded and made it more difficult to manually enter journals which should affect the VAT return.

As of version 4.60 we introduced changes to begin including JJ journals on the VAT return. Since JJ journals had never been included they were never marked as VAT reconciled, and this meant that the VAT return could potentially now include old JJ journals since the date you began using Brightpearl. In order to prevent this, part of the transition to including JJ journals was to mark old JJ journals (dated before 1st January 2014) as reconciled.

I thought JJ journals were always included, does that mean my past VAT returns were wrong?

Most JJ journals are system created and tax is not applicable - they are always assigned the "T9 Not rated" tax code. The filters on the General Ledger report can be used to identify JJ journals with tax codes, this will allow you to identify journals and investigate whether those transactions should have been included in a past VAT return.

What does this mean for reconciled VAT returns?

Reconciled VAT returns are not affected by these changes. However, if you choose to remove a VAT return which was reconciled before these changes of version 4.60 and that VAT return covers dates within 2014 and JJ journals with tax codes (other than T9) exist, then a different result would be given even if no additional activity was recorded. Obtaining a list off JJ journals with tax codes using the filters on the General Ledger report will allow you to identify those journals which will now be included.

How do I identify those JJ journals?

The filters on the General Ledger report allow you to identify journals by type, date range and tax code. Go to Reports > General Ledger and search for JJ journals for your VAT return period and then search by one tax code at a time to identify those JJ journals using a tax code which would cause it to display on your VAT return (i.e. a code which is not T9 Not rated).

Find_JJ_jnl

How do I make sure those journals are not included?

Using the process above you can identify those journals. Open to edit the journal and change the row tax codes to "T9 Not rated". This will exclude the values from the VAT return.

I don't want JJ journals prior to 1st January 2014 automatically reconciled. Can you undo this?

Yes, if you wish to include JJ journals made prior to 1st January 2014 on your next VAT return we can remove the "reconciled" flag. Please contact our Support team to request this is done.

Cash scheme

The VAT return includes the following journal types:

  • SI & SC

    Only where a payment is allocated against the invoice.

    Only sales (4000-4999), purchase (5000-5999) and tax control accounts (2200 & 2201) will be included in the VAT return.

  • PI & PC

    Only where a payment is allocated against the invoice.

    Only sales (4000-4999), purchase (5000-5999) and tax control accounts (2200 & 2201) will be included in the VAT return.

  • BR

    Excludes postings to purchase nominal codes (5000-5999).

  • BP

    Excludes postings to sales nominal codes (4000-4999).

All JJ, SR and PP type journals will be excluded even if a tax code has been assigned to the journal row.

Flat Rate VAT

Brightpearl accounts for VAT in full or each transaction. When reporting Flat Rate VAT, you will need to make accounting corrections for the difference in sales VAT and for any purchase tax posted.

The VAT return displays values as per the standard or cash VAT schemes. You will need to make calculations on the figures to ensure the balances are correct as per the FRV return rules.

For more information on VAT and filling out your return, please consult your accountant.

EC sales & purchases

The VAT return boxes 8 and 9 will include all sales and purchases which use the tax codes T4, T7 and T8.

Box 2 will display tax on EC purchases (purchases using tax code T8) using the rate from the company default tax code chosen at Settings > Company > Accounting: Tax.

Use the EC sales list to produce a report for the Inland revenue. Click Reports > Accounts...More > EC Sales list.

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