Simplifying VAT rates - Purchases
These are some of the common VAT rates you will need to use for purchases in Xero:
| TYPE OF SPEND | VAT RATE IN XERO | REASON |
| Bank fees | Zero rated expenses | Exempt from VAT but needs to appear on the VAT return, so we use zero rated. |
| Travel costs in the UK | Usually zero rated, sometimes 20% VAT on expenses | Most travel is exempt from VAT but the spend needs to appear on the VAT return, so we use zero rated. Sometimes travel is 20% VAT. |
| Travel costs abroad | No VAT | Outside the scope of UK VAT. |
| Software costs from outside of the UK (services) | Reverse charge expenses (20%) | The reverse charge mechanism operates for services purchased from outside of the UK. Many large software companies in EU for VAT purposes (e.g. Google), therefore the reverse charge principle applies and you cannot claim back the VAT. However, after Brexit, some companies have started registering in the UK and charging VAT so keep an eye out for this. |
| Purchase of goods from Amazon | 20% VAT or zero rated expenses | Depends on the supplier. If they are a UK VAT registered supplier you can claim back the VAT. If they are outside of the UK it is 'zero rated expenses' as you cannot claim back the VAT but it must appear on your VAT return as a purchase. |
| Client entertainment | Zero rated expenses | VAT on entertaining clients cannot be claimed. There is an exception to this - VAT on entertaining clients who have come from the UK from abroad CAN be claimed :) |
| Staff entertainment | 20% VAT | VAT on entertaining staff can be claimed. If defined as non trivial (i.e. greater than £50) this could be classified as a taxable benefit on staff. |
| Insurance | Exempt | Insurance is exempt from VAT, therefore it is classified as 'Exempt' in Xero. |
| Services (e.g. consultancy & legal) | Usually 20% VAT | Most services from UK suppliers VATable at the standard 20%. However, keep an eye out as some smaller contractors/consultants may not be VAT registered and will therefore not charge VAT on their services. Services from suppliers outside the UK should be subject to the reverse charge. |