VAT Return journals

If your business is registered for VAT, you'll accrue VAT liability as you enter Vat able transactions into Accounting.

Submit a VAT Return to HMRC for each VAT period to report payable or reclaimable VAT amounts.

When recording transactions, record VAT amounts against the following VAT nominal's.

Invoice-Based VAT Scheme (Standard or Flat Rate Invoice-Based)

2200	VAT on Sales	Credit
2201	VAT on Purchases	Debit

Cash-Based VAT Scheme (Cash Accounting or Flat Rate Cash)

2200	VAT on Sales	Credit
2201	VAT on Purchases	Debit
2205	VAT on Sales Holding Account	Credit (Unpaid Sales Invoices)
2206	VAT on Purchases Holding Account	Debit (Unpaid Purchase Invoices)

In a Cash-Based VAT Scheme, record VAT from unpaid invoices in the VAT holding account is nominal. Upon payment, transfer it to the standard VAT nominal account for inclusion in the VAT Return.

TIP: Bank payments and journals, which affect the VAT nominal will directly affect these balances at the time of recording the transaction.

The postings made when you complete a VAT Return

The process of generating and completing a VAT Return also automatically posts the necessary journals to clear the liability on your VAT nominal's. The journals posted are as follows (assuming positive liability values for Sales and Purchases):

Standard and Cash Accounting

2200	VAT on Sales*	Debit (Box 1 value)
2202	VAT Liability	Credit (Box 1 value)
2201	VAT on Purchases	Credit (Box 4 value)
2202	VAT Liability	Debit (Box 4 value)

The overall balance in the VAT Liability nominal represents the payment or reclaim for VAT (Box 5 value). Any adjustments on the VAT Return to Box 1 or Box 4 will post using the Corrections nominal 9999.

It’s important to be aware of this as the cumulative balance of this nominal will appear on your Profit and Loss (P&L) report.

Flat Rate Schemes

Transactions on a Flat Rate VAT Scheme handle VAT similarly to Non-Flat Rate Schemes. Record all VAT liability, including on purchases, as usual. Apply the Flat Rate Scheme criteria only when creating the VAT Return.

When generating the VAT Return, see the gain or loss from the Flat Rate Scheme versus the Standard Scheme.

For Example:

Sales Invoice: £600 Net + £120 VAT = £720 Total
Purchase Invoice: £300 Net + £60 VAT = £360 Total

On a Standard VAT Scheme, calculate the Box 5 value as £120 – £60 = £60 payable.

On a Flat Rate Scheme (10%), the Box 5 value equals £72 payable, creating a difference of £12.

Saving the VAT Return posts journals applying the Flat Rate VAT percentage and accounting for purchase VAT and scheme gain or loss.

2200	VAT on Sales	Debit (Total Sales Value)
2202	VAT Liability	Credit (Total Sales Value)
2201	VAT on Purchases	Credit (Total Purchase Value)
2202	VAT Liability	Debit (Total Purchase Value)

In addition, the following journals post:

2202	VAT Liability	Credit (Difference Value)
4900	Other Income	Debit (Difference Value)

The above posting assumes a loss to the business on this return. If the business had gained money, then the journal would reflect the exact opposite.

Any adjustments on the VAT Return to Box 1 or Box 4 will use the Corrections nominal 9999 for posting. It's important to note this, as the cumulative balance of this nominal will appear on your Profit and Loss (P&L) report.

TIP: Adjustments to the return won't change the calculated difference value on the VAT Return.

The postings made when you pay or make a reclaim from your VAT Return

After completing your VAT Return, there's the option to Submit by Other Means or Submit Online to HMRC. Once the return's saved, you can choose to record payment or reclaim amounts from this VAT Return. Within the VAT Return, click the button that appears and enter the details to record this transaction.

Journal post as follows:

For a VAT reclaim

2202	VAT Liability	Credit (Box 5 value)
1200	Bank	Debit (Box 5 value)

For a VAT payment

2202	VAT Liability	Debit (Box 5 value)
1200	Bank	Credit (Box 5 value)

The postings made when you record transactions