Stock - Zero Rating Goods and Services
Table Of Contents
Introduction
There is often confusion between zero-rated VAT supplies and VAT-exempt supplies, particularly when configuring customer records in Khaos Control.
This article explains the difference, outlines HM Revenue & Customs (HMRC) guidance on zero-rating, and clarifies how the Company Pays Tax setting affects VAT processing within Khaos Control.
HMRC Guidance on Zero-Rated Supplies
According to HM Revenue & Customs Notice 701/6, certain goods and services may qualify for zero-rating in very limited circumstances.
Examples include specific medical, veterinary and similar equipment purchased using charitable or donated funds.
The notice explains:
- When goods and services purchased with charitable or donated funds by eligible bodies can be zero-rated.
- When goods and services purchased by a third party for donation to an eligible body can be zero-rated.
- What constitutes an eligible body for the purposes of this relief.
- The conditions that must be met before goods and services can be zero-rated.
HMRC also provides a supplementary document containing example declarations for qualifying purchases made by, or donated to, eligible bodies.
Supplier Responsibilities
HMRC states that suppliers must obtain appropriate evidence before applying zero-rating to a qualifying supply.
"It's your responsibility to ensure that all the conditions for zero-rating are met. Ideally, you should obtain a written declaration of eligibility from your purchaser. The declaration should be separate, or clearly distinct from, any order or invoice for the purchase."
"The declaration should include enough information to show that all the conditions for zero-rating have been met. The evidence needs to be specific and detailed, and you must keep it with your records."
Source: VAT for charities and not-for-profit organisations: introduction (accessed 10 January 2011).
How This Applies to Khaos Control
On the Customer/Supplier General tab, there is a Company Pays Tax checkbox.
Because of the wording, some users have assumed that unticking this option will automatically make all sales to that customer zero-rated for VAT purposes.
This is not the case.
What Happens When "Company Pays Tax" Is Unticked?
When the Company Pays Tax checkbox is unticked, Khaos Control treats the customer as VAT exempt.
As a result:
- Sales Orders created for that customer are treated as VAT-exempt.
- The transactions are not handled as zero-rated supplies.
- The transactions are excluded from VAT reporting where appropriate.
Zero-Rated vs VAT-Exempt
Although both result in no VAT being charged to the customer, there is an important difference in how they are reported.
| Zero-Rated Supplies | VAT-Exempt Supplies |
|---|---|
| Included on VAT Returns. | Not included on VAT Returns. |
| Included on EC Sales Lists and Eurostat reports where applicable. | Not included on EC Sales Lists or Eurostat reports. |
| Still considered taxable supplies at a VAT rate of 0%. | Treated as exempt from VAT. |
For this reason, the Company Pays Tax setting should not be used as a method of applying zero-rated VAT treatment.
Identifying Customers Marked as VAT Exempt
You can identify any customers or suppliers where Company Pays Tax has been unticked by running a Health Check.
The Health Check report will list all Customer and Supplier records configured in this way, allowing you to review them and ensure the setting has been applied correctly.
Important Considerations
Before unticking Company Pays Tax, ensure that:
- The customer genuinely qualifies for VAT-exempt treatment.
- You have appropriate documentation to support the VAT status.
- You understand the reporting implications for VAT Returns and other statutory reports.
- The customer should be treated as VAT exempt rather than receiving a zero-rated supply.
If you are unsure whether a transaction should be zero-rated or VAT exempt, consult your accountant or tax adviser and refer to the relevant HMRC guidance before making changes to VAT settings in Khaos Control.