Guide: Changing the VAT Rate
The UK Government has announced that the rate of VAT applied on most tourism and hospitality-related activities will be temporarily cut from 15 July 2020 to 12 January 2021. The rate of VAT changes from 20% to 5%. We have put together this guide on how to apply the new rate of VAT.
Calculation
To calculate the amount of VAT due when charging 5% you can use the following formulas.
Gross amount – gross amount divided by 21
Net amount – net amount divided by 20
Accounting Software
The UK currently has a 5% reduced rate of VAT for various goods and services. As such, many accounting systems will already have an option to select 5% VAT. For the more popular accounting systems, below we have detailed how to select 5% VAT or add it to your accounting system. Should you use another accounting system or require assistance when making any changes please contact us.
| Use 5% | Add 5% | Default 5% | |
| Xero | Select 5% (VAT on Income / VAT on Expenses) from the Tax Rate box when entering transactions | A 5% option is generated automatically by Xero. However, should you not have a 5% option you can add it by selecting Accounting, Advanced, Tax Rates and clicking New Tax Rate. Fill in the boxes on screen and select Save | |
| Sage 50 Accounts | T1 is the standard tax code to use in Sage and calculates VAT at 20%. Using T5 will calculate VAT at 5% | Some users will be tempted to change the T1 tax code to 5% as this is the default. This should be avoided as you will still require a 20% tax code as many of your suppliers will still be charging you 20% | |
| Sage Business Cloud | Select the Lower Rate 5% option from the VAT Rate box when entering transactions | ||
| IRIS Kashflow | Select 5% from the VAT Rate box when entering transactions | A 5% option is generated automatically by Kashflow. However, should you not have a 5% option you can add it by selecting Settings, VAT Settings, and under the VAT Rates section entered 5% in the Add Rate box and click the + symbol | You can change the default VAT rate to 5% by selecting Settings, VAT Settings, and under the VAT Rates section selecting 5% from the drop-down menu under Default VAT Rate |
| QuickBooks Desktop | Select Reduced (5%) from the VAT column when entering transactions | A 5% option is generated automatically by QuickBooks. However, should you not have a 5% option you can add it by the top menu by selecting VAT, Manage VAT, Change VAT Setup, select Add A New VAT Rate, click Next through the screens adding the requested detail | To change the default VAT rate select from the top menu, VAT, Manage VAT, Assign VAT Codes, Bulk Changes and change the default VAT rate as needed |
