Learn VAT bookkeeping by doing it

VAT is a tax on sales. A business that is registered for VAT adds it to its prices, collects it from its customers and passes it on to HMRC.

Output tax

the VAT a business charges on its sales. It is owed to HMRC

Input tax

the VAT a business pays on its purchases and expenses. It is claimed back from HMRC, unless the law blocks it

Net

the price before VAT

Gross

net plus VAT: what the customer pays

At the end of each VAT period the business sets its input tax against its output tax. If output tax is the larger, it pays the difference to HMRC. If input tax is the larger, HMRC pays the difference to the business.

In the books, sales and purchases are posted at their net amount. The VAT goes to an account of its own, the VAT control account. Output tax is credited to it and input tax is debited to it.

Starling Signs makes shop signs and is registered for VAT. These are its VAT figures for one quarter, as they reach the VAT control account from the day books and the cash book.

The credits come to £4,035.00 and the debits to £2,285.00. The balance is a credit of £1,750.00, so Starling Signs owes HMRC £1,750.00 for the quarter. A credit balance on this account is a liability.

The VAT return reaches the same figure another way. VAT due on sales is £3,895.00, after the credit notes sent to customers. VAT reclaimed on purchases is £2,145.00, after the credit notes from suppliers. The difference is £1,750.00.

• Tell output tax from input tax, and say which side of the VAT account each goes on.
• Work out the VAT on a net amount, and take the VAT out of a gross amount, at the rate a question gives.
• Tell standard rated, reduced rated, zero rated, exempt and outside the scope apart, and say what each does to the VAT a business can claim back.
• Check that a VAT invoice shows what it must, and find its tax point: the date the sale counts as made for VAT.
• Split an invoice into net, VAT and gross in a day book, and post the three totals.
• Say when the VAT column of the cash book is used, and when it is left empty.
• Build the VAT control account for a period and read its balance.
• Fill in the boxes of a VAT return from the books, and check the result against the VAT control account.

These are the modules to take, first to last.

1. How VAT works. Output tax and input tax, the kinds of rate, what is exempt and what is outside the scope, who has to register, and how to take the VAT out of a price that includes it.
2. VAT. Net, VAT and gross on a sale, then the three line entry for a sale with VAT and for a purchase with VAT.
3. VAT invoices. What a VAT invoice must show, tax points, simplified invoices, VAT on a credit note and how VAT is rounded.
4. VAT in the books. The VAT columns of the day books and the cash book, the VAT control account, VAT that cannot be reclaimed and relief for a debt that is never paid.
5. Payables and VAT control accounts. Its last two rooms build the VAT control account for a quarter and reconcile it to the return. The rooms before them cover the purchases ledger control account.
6. The VAT return. What each of the nine boxes means, how the figures come out of the books, whether the business pays or reclaims, and a whole return from start to finish.
7. VAT schemes and rules. Cash accounting, the flat rate scheme and annual accounting, how an error on a return is corrected, and the digital records HMRC expects.

The first module is sums and sorting, with no posting. From the second one on, VAT is posted to accounts, so learn debit and credit first if they are new to you.

The rates of VAT, the registration threshold, the limits for each scheme and the dates for returns and payments are set by the government, and they change. None of them is given here. The current ones are on GOV.UK.

A question in a room gives any rate it needs, as an example for that question. Ledger Drill is practice in how the record and the sum work. It is not tax advice.

• Taking the rate off a gross price to find the net. The VAT was worked out on the net, which is the smaller figure, so this takes off too much. Use the VAT fraction for that rate: the share of a gross price that is VAT.
• Posting a purchase at its gross amount and leaving VAT out. That counts the VAT as a cost. Purchases is too high, and the VAT that could be claimed back is missing from the VAT account.
• Putting VAT in the cash book for money received from a credit customer. The VAT was recorded when the invoice went into the sales day book, so this counts the same VAT twice.
• Treating zero rated and exempt as the same. With both, the customer pays no VAT. The seller of a zero rated supply still claims back the input tax on its costs. The seller of an exempt supply cannot claim back the input tax on the costs of making that sale.
• Claiming input tax that is blocked, such as the VAT on entertaining customers. Blocked VAT does not go to the VAT account. It becomes part of the cost of the thing that was bought.
• Claiming input tax with no valid VAT invoice. A pro forma invoice is a request for payment in advance, and VAT cannot be claimed back from it.
• Changing a return so that it matches the books. If the return and the VAT control account disagree, the difference is found and put right first.

Ledger Drill teaches VAT through questions, with no videos. A task is a few lines of reading, then questions on the figures of one invented business.

• Type the VAT on a net amount, or the VAT inside a gross one, at the rate the question gives.
• Sort sales into zero rated, exempt and outside the scope, and VAT figures into output tax and input tax.
• Build the journal for a sale or a purchase with VAT, line by line.
• Find the one wrong line in an invoice, a day book or a VAT account.
• Type the figure for each box of a return from a quarter's totals, then post the payment to HMRC.

Every answer is marked at once, with the rule or the working behind it.

The modules and rooms are listed below, in order. A room that costs nothing carries a Free tag.