Simplifying VAT rates - Purchases
Overview 📘
When recording expenses in Xero, it’s important to select the correct VAT rate so your VAT return is accurate.
Below is a summary of common types of expenditure, the typical VAT rate to apply, and the reasoning behind each.
✅ VAT Rates by Spend Type
| Type of Spend | VAT Rate in Xero | Reason / Notes |
|---|---|---|
| Bank Fees | Zero Rated Expenses | Bank charges are exempt from VAT, but they still need to appear on your VAT return. Use “Zero Rated Expenses” to ensure they are included correctly. |
| Travel Costs (UK) | Usually Zero Rated (sometimes 20%) | Most UK travel costs (such as train, bus, or flight tickets) are exempt from VAT. However, some expenses like taxi fares or accommodation may include VAT at 20%. Check the supplier invoice before posting. |
| Travel Costs (Abroad) | No VAT | Overseas travel costs fall outside the scope of UK VAT. These do not affect your UK VAT return. |
| Software Costs from Outside the UK (Services) | Reverse Charge Expenses (20%) | The reverse charge applies to digital or service-based purchases from overseas suppliers. Xero will calculate both output and input VAT automatically. After Brexit, some companies (e.g. Google, Microsoft) now charge UK VAT directly - check each invoice. |
| Purchase of Goods from Amazon | 20% VAT or Zero Rated Expenses | Depends on where the supplier is based: – UK supplier: 20% VAT, reclaimable if the invoice shows a valid VAT number. – Non-UK supplier: Use Zero Rated Expenses so it appears on your VAT return but no VAT is reclaimed. |
| Client Entertainment | Zero Rated Expenses | VAT on entertaining clients cannot be reclaimed. 💡 Exception: If the client is a non-UK visitor, VAT can be reclaimed. Keep documentation to support this. |
| Staff Entertainment | 20% VAT | VAT on staff entertainment (such as team meals or annual parties) can be reclaimed. However, if the benefit is significant (more than £50 per person), it may count as a taxable benefit for employees. |
| Insurance | Exempt | Insurance is VAT-exempt under UK law. Classify as “Exempt” in Xero to ensure it is excluded from your VAT return calculations. |
| Professional Services (e.g. Consultancy, Legal, Accounting) | Usually 20% VAT | Most UK-based professional services are standard-rated at 20%. However, smaller consultants or contractors may not be VAT registered and will issue invoices without VAT. 💡 Services from overseas suppliers should be treated under the reverse charge rules. |
💡 Best Practice Tips
- Always check invoices carefully - suppliers outside the UK often list prices without UK VAT.
- Use “Zero Rated Expenses” only when the spend must appear on your VAT return but no VAT is reclaimable.
- For reverse charge services, ensure Xero is set up to calculate both the output and input VAT correctly.
- Keep all VAT invoices and receipts as supporting documentation.
🔗 HMRC: VAT rates and what they apply to
✅ Summary
- Use the correct VAT rate in Xero based on where the supplier is located and the type of expense.
- Some expenses (e.g. entertainment, insurance) are exempt or non-reclaimable.
- Review each supplier’s VAT status regularly - many EU companies now charge UK VAT directly.
- Maintaining accuracy ensures your VAT returns are compliant and minimises the risk of HMRC queries.