VAT rates - exempt and out of scope

VAT rates - exempt and out of scope

Good Evening,

UK based company here. I am a bit confused in respect of setting up VAT rates for exempt goods and services; at present I am simply leaving the VAT rate blank in the transactions in order to prevent any VAT appearing in the VAT return.

When setting up a new VAT code, there is not the option to exclude specific rules for the VAT code (i.e. exclude elements with this tax code from the VAT return for out of scope items, and that items are exempt and are neither zero rated, nor out of scope). The idea of having to use different nominal accounts to exclude transaction from the VAT return (e.g. because you are buying stationery from a non-VAT registered vendor, this would be considered out of scope) seems overly complicated; it is hard enough teaching non-financial people how to code VAT rates on their own, let alone specific combinations.

My concern over the exempt confusion is that, if the app records at 0% (rather than flagging as exempt), should a situation arise where we make sufficient sales of exempt services (unlikely given our industry, but not impossible) to breach the de minimis threshold, that we will not be able to report correctly for partial exemption, nor be able to make the correct calculations for irrecoverable input VAT. (I am bringing my experiences from previous roles rather than where I am currently working. I am aware that if there are persistant errors or inconsistencies in VAT returns, this can trigger a full VAT investigation. Having done one of these in my career, it is my intention to NEVER have to one again - the only way to do this is to have clear best practice).

So in short - how can I set up an out of scope VAT rate to be excluded from the VAT return without having to set up separate nominal accounts for the same thing so that it doesn't require a VAT accountant to be the bookkeeper, and how can I set up an exempt rate that can be reported on to ascertain the level of exempt supplies of services that we make?

Thank you.

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