Simplifying VAT rates - Sales

There are normally only two VAT rates that you will need in Xero when creating sales invoices:

  1. Sales of services to UK customers are always at 20% VAT, regardless of whether the customer is a business or a consumer. The relevant VAT rate to choose in Xero is '20% (VAT on income)'.
  2. Sales of services to business customers  outside the UK (including the EU) are outside the scope of UK VAT. For these sales you need to select the VAT rate 'zero rated income' in Xero. 
  3. Sales of digital services to consumers in the EU may fall under the VAT OSS rules - this means that you might need to charge them the VAT rate at their local rate. Please contact us if you think this might be the case.

For sales of services to business customers outside the UK you should include the following wording on the invoice: "This invoice is subject to the reverse charge for VAT purposes". In order to do this we would recommend setting up a separate invoice template in Xero.

The table below summarises the three VAT rates you would typically use for sales invoices.
Type of sale Xero VAT rate
B2B Sale to UK customers 20% (VAT on income)
B2B Sale to EU business  Zero rated income
B2B Sales outside the EU Zero rated income
The above rules apply to sale of services only, not goods. There will of course be some exceptions to these rules (e.g. if you are distance selling to EU customers), but generally this should see you through for most of the transactions that occur. If you come across a more complicated transaction or you think that VAT OSS might potentially apply, please do not hesitate to contact us.

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