UK tax code "Outside of Scope of VAT"?

Apologies if this was covered before… it seems basic, but I couldn’t see it when searching the forum.

In the UK, “Outside of Scope for VAT” is a different tax code compared to VAT exempt, yet I fail miserably to set up such a tax code.

The big different is in boxes 6 and 7, which should not increase with payments “outside the scope of VAT” (such as salary payments or paying NI/PAYE to HMRC).

The easy way out would be not to attach a tax code to these transaction, but I do not like this quick fix from a compliance perspective: In my previous accounting system (SAGE) I had a UK tax code of “outside of scope” (T9 for former SAGE users) to demonstrate that I have put a transaction deliberately outside the scope of VAT rather than just “forgot” to add a tax code.

How are other UK users dealing with this in Manager? Many thanks for your thoughts.

You can create custom tax code and use it for this purpose if you prefer not leave tax code column blank.

Why do you fail to setup such a tax code? What have you tried and where are you stuck?

I have tried to set up one. Trouble is, all payments where I assigned it show up in box 6 of the VAT report, which they should not do with a tax code out of scope.

You need to follow procedures for a custom tax code, not a zero percent code.

I thought I had done that (?)
However, I am not aware how I can add a new reporting category for this new tax code, yet all reporting categories available update box 6 on the VAT return report.

In case you are not UK based, here’s a brief intro what this elusive tax code needs to cover:

If a transaction is outside the scope of VAT, you should treat it as being truly outside the scope of VAT. That is, you should not use any VAT – related tax code. Or any tax code, for that matter.All around the world, it is common to create transactions that include both taxable and un-taxable line items.

It is interesting that, of all the users of Manager in the United Kingdom, you are the first one who has ever mentioned this as an issue. You are fortunate to be operating in one of the few countries where the program has a complete localization. None of your fellow UK users seems to find this to be an issue.

I have no intention of arguing with you, but “you are fortunate to have…” is not a great vibe when evaluating software… I am in the process of moving away from SAGE… if manager isn’t up it, I am sure I will find something else.

“Outside the scope of VAT” is a very specific UK tax code, and all genuine UK-based packages recommend using a tax code to indicate that a transaction was deliberately placed outside the scope of VAT rather than a tax code just being forgotten during sloppy data entry.

Furthermore, this has actually been raised on the forum, which is why I had finished my initial query asking other users how they deal with it.

@JCampbell, in the future, rather than posting a screen shot of many-year-old posts, please quote them using the quote feature of the forum’s composing pane. It took me quite a while to track down the old post you were referring to.

If you read that entire thread, you will see that the other forum member described a personal workflow and apparent preference. But, when asked for official documentation requiring an Outside the Scope tax code, nothing was provided. The developer’s position has been that whenever something is required by regulation, it should be built into the program. Are you able to furnish such documentation? If so, the separate tax code should be added to Manager’s localization for the UK.

To be clear, I am not a qualified UK accountant. But my reading of HMRC regulations reveals no such requirement, only guidance about which transactions fall outside the scope of VAT.

Apologies for the screenshot - newbie mistake on the forum (first post)

And I am not a qualified accountant either, just a business owner who is doing her own accounting, and who does exactly what her accountant tells her…

Please have a look at this HMRC notice:

When you scroll down the examples, you will see that there is a clear distinction between zero rated, exempt, and outside of scope of VAT (e.g. charitable donations or certain toll bridges (a regular on my commute to a major client)).

Given that the requirement is there, it doesn’t feel right to fulfil this by just leaving the tax code field empty.

Yes, I am aware of this list. But it only tells you which goods and services are outside the scope of VAT. It definitely does not require an explicit tax code for such goods or services. In fact if you follow one of the links in that list, you see there are only three rates, all numerical. There is no outside the scope rate.

Why not? The transaction is outside the scope of the entire VAT scheme.

Nevertheless, if you want (or your accountant wants) to define a specific tax code for Outside the Scope, you can. I wrote in a previous post that you should use a custom rate tax code with 0% rather than a zero percent tax code. Actually, under current implementation, there will be no difference. The key is that you can purposely not choose a reporting category. (In other words, leave that field blank, so the transactions stay out of your sales or purchase totals.) But there may be some cases where you want to include them. But in that respect, you would be going beyond my expertise. Conduct some experiments with your accountant. You may actually decide you need to put the new custom code into the Exempt category.

At this stage, I bow out of further discussion, because you have exhausted my knowledge applicable to your situation.

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Thank you very much for your input, but let’s just revert this to my original question… how do other UK users handle this?

Any thought from VAT-registered businesses / accountants based in the UK hugely appreciated…
As Tut stated, clearly I can’t be the only one with this issue.

If the transaction is outside the VAT scope, do not use a tax code

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Why do you not consult a tax accountant. I understand that you are worried and want to do the right thing. The right thing was advised to you, i.e. do not add any tax but somehow you are uncertain.

Make Reporting Category field empty when creating custom tax code. Basically do not select anything in it.

Selecting Reporting Category is what makes the tax code to appear on your country-specific tax report.

Hi @JCampbell, I think you’re trying a bit too hard for something that’s supposed to be simple. The short answer echos what other members have said already and that is that as general rule of thumb is not to codify anything that isn’t required to be reported.

However, if you have a few minutes to spare, we can get into the details.

First of all, I’m not a UK accountant by any means but in my home country Bahrain, we have a very similar setup.

Basically business activities are divided into two categories:

  • Value adding activities. These are subject to VAT laws and they are creating new value by means of consumption or transfer down the supply chain towards final consumption. Examples are sale of goods, sale of services and consumption and transformation of goods, services and operating assets. These can be taxable, zero rated or exempt and they fall within the scope of VAT.

  • Non-value adding activities. These are incidental transaction to value creation and/or consumption and they’re outside the scope of VAT. Typically taxing these transactions will result in double counting of tax. Examples are payments of previously invoiced sales which if taxed, would double count the value invoiced; and payment of staff salaries which if taxed would be taxation of earnings and consumption which is more than double the intended tax burden on consumers.

As explained before, check your requirement for tax reporting:

  • If your tax authority requires that you report transactions outside of scope → Create a separate Reporting Category called “Out-of-scope” → Create a separate Tax Code called “Out-of-scope” and use it for every line that’s outside of scope as @lubos already suggested.

  • If your tax authority doesn’t require you to report transactions outside of scope (which is the case according to the image you already shared) → don’t codify anything as suggested by @lubos, @Tut and @Joe91. (who I believe is a UK based taxpayer… apologies if I got this wrong)

Of course you can still take the route codify everything even if it isn’t required by law, but that’s doing extra work that nobody asked for.

Hopefully, you have been able to resolve your issue by creating a customised tax-code for out-of-scope items and NOT selecting any reporting category to avoid it getting onto the VAT Worksheet.