When dealing with VAT it's important that you are aware of the distinction between 0% and N/A VAT:
- 0% means there is a VAT element (although it's 0%) so the NET amounts on the transactions will be included to the VAT report.
- N/A is any sale that falls outside the scope of VAT. NET amounts will not be included in the VAT report.
CLASSIFYING YOUR TRANSACTIONS:
- Zero rated goods - Set VAT to 0% so there's no charge. However you still must show this VAT information on your invoices, so the net amount is included in your VAT Return. Eg: trains & tubes, some food, scheduled flights.
- Exempt goods - Set VAT to 0% so there's no charge. You don't include them in your VAT accounts. Normally you cannot claim back the VAT on related purchases. Including Sales/purchases net amount in VAT return Box 6 & 7. Eg: postal supplies provided by the post office (eg, you buying stamps), Insurance, Financial Services/bank charges.
- Outside the scope – Set VAT rate to N/A. Some goods and services aren't covered by the UK VAT system at all - they're outside the scope of VAT. Not to be included in VAT return. Eg: donations to charity, unregistered suppliers, payroll transactions.
This article from HMRC will provide further clarification on handle VAT Exempt goods and goods outside the scope of VAT: http://www.hmrc.gov.uk/vat/forms-rates/rates/rates.htm.
ADJUSTING THE DEFAULT RATES:
You can adjust the default VAT rates by going to Settings > VAT Settings > Default VAT Rate. This page is also found via: Settings > Invoice Options > Tax Settings. You can configure the default VAT rate on an individual Sales Type (Sales > Sales Types), Outgoing Type (Purchases > Outgoing Types) or Transaction Type (Bank > Transaction Types). Configuring here, within Sales, Outgoing or Transaction Type will override the settings within Settings > VAT Settings.