I have a client who has just taken on a new contract providing before & after school childcare. His accountant tells me that this income is exempt from vat. My client also has other income that is charged at 20% vat.
When I enter the exempt from vat income invoices in Xero I have used the vat exempt tax code. I am now about to submit his latest vat return and find that the box 6 figure is including the exempt from vat income, so the box 1 figure is not 20% of the box 6 figure, it is significantly less. I thought the vat return box 6 figure is not supposed to include exempt goods or services in your taxable turnover for VAT periods. I also know that it is important that the box 1 figure is 20% of the box 6 figure and that HMRC use this as a check.
Please could anyone with experience of Xero please advise if I should be using a different tax code for this exempt from vat income?
If the income is outside the scope of VAT (not exempt - exempt is used for purchases generally), use "No VAT" in Xero, if none of this income is to be included in the VAT return, or you could use "Zero Rated Income", if it does need to be included in the VAT retrun.
Edited at 20 Jun 2019 05:57 AM GMT