Tax Compliance — HMRC (UK) and VAT

What is this page about: How Light handles UK VAT: configuring your VAT registration and tax codes, how input and output tax are recorded, how a VAT return is prepared and filed with HMRC through Making Tax Digital, and what to keep for an audit. It assumes your UK entity is VAT registered.

On this page

• Understanding VAT
• VAT configuration in Light
• Tax codes and VAT treatment
• VAT on purchases (Input Tax)
• VAT on sales (Output Tax)
• Intrastat and the reverse charge
• VAT returns
• MTD integration for VAT
• Multi-entity VAT
• EU transactions and VAT
• VAT exemption management
• Audit documentation
• Related articles

Value Added Tax (VAT) is a consumption tax applied at each stage of production and distribution in the UK and EU. The framework carries multiple rates, exemptions and reverse-charge mechanisms, and Light automates VAT calculation, reporting and HMRC submissions across all of them.

# Understanding VAT

VAT is collected from customers on sales and can be reclaimed on purchases. A business collects VAT from customers, reclaims VAT from suppliers, and remits the net difference to HMRC.

VAT rates in the UK:

• Standard rate: 20% (most goods and services)
• Reduced rate: 5% (fuel, children's car seats, energy-saving materials)
• Zero rate: 0% (food, books, newspapers, children's clothing)
• Exempt: No VAT charged or recoverable (insurance, financial services, postage stamps)

Within the EU, digital services are subject to the customer's country VAT rate, creating complexity for e-commerce and SaaS businesses.

Good to know: VAT is calculated per line, based on that line's net or gross amount and its tax code. How VAT applies to freight or discounts follows from how you enter those as their own lines, since the calculation works line by line rather than applying a fixed sequence.

# VAT configuration in Light

Light requires configuration of your VAT treatment:

1. Navigate to Settings → Entities and add your VAT registration number to your UK entity. Enter it with or without the GB prefix, since Light formats it correctly when communicating with HMRC
2. Navigate to Settings → Tax codes to review the UK tax codes and rates applied to your transactions

Once configured, Light automatically applies VAT rules to all transactions.

# Tax codes and VAT treatment

In Light's ledger, each tax code maps to a VAT treatment:

Standard Rate (20%):

• Most supplies of goods and services
• Commercial rent
• Construction services

Reduced Rate (5%):

• Fuel and power
• Children's car seats and safety seats
• Installation of energy-saving materials

Zero Rate (0%):

• Food and food ingredients
• Books and printed matter
• Children's clothing and footwear
• Newspapers and periodicals

Exempt:

• Insurance
• Financial services
• Postage stamps
• Education (by eligible institutions)
• Health services (by eligible providers)

Reverse Charge (no VAT on purchase, VAT deferred):

• Services from EU businesses under reverse-charge rules
• Construction services (domestic reverse charge)

Configure each tax code to map to these categories. Light then automatically applies the correct rate to transactions using that code.

# VAT on purchases (Input Tax)

When you purchase goods or services, VAT is charged. You can recover this VAT (input tax) if:

1. The purchase is for business purposes (not personal use)
2. The supplier is VAT-registered and charged VAT
3. You have a valid invoice from the supplier
4. The invoice includes the supplier's VAT number

In Light, when you record a purchase (AP invoice) with a VAT tax code, the VAT is categorised as recoverable input tax. This appears on your VAT return as a reduction in VAT owed.

Tip: Keep all supplier invoices. HMRC requires supporting invoices for all VAT claims. Light maintains a complete audit trail of all VAT transactions.

# VAT on sales (Output Tax)

When you make a sale, you charge VAT (output tax). This VAT is owed to HMRC. In Light, when you create an AR invoice with a VAT tax code, the VAT is categorised as output tax.

Your VAT liability = Output Tax (from sales) - Input Tax (from purchases)

If input tax exceeds output tax (common for exporters or businesses with many exempt supplies), you receive a VAT refund.

# Intrastat and the reverse charge

When selling to customers in other EU countries, specific rules apply:

Distance selling: If you sell goods to private consumers in the EU, you charge your own country's VAT. When sales exceed EUR 10,000 to a country, you must charge that country's VAT instead.

Reverse charge for services: Services supplied to non-VAT-registered consumers in other EU countries are reverse-charged (the customer pays VAT in their country).

Reverse charge for goods from EU: When you purchase from EU suppliers, you may be charged VAT but use reverse-charge treatment (record as no VAT, with the VAT deferred until you resell).

In Light, you apply reverse charge by selecting the reverse-charge tax code (EDIFACT code AE) on the relevant line. Setting a customer or supplier's country to an EU member state controls whether a reverse-charge notice prints on the invoice, while the tax code you choose determines the tax treatment itself.

Important: Cross-border VAT rules change, and they differ depending on where your entity is registered. Confirm your own position with your tax adviser rather than relying on this summary.

# VAT returns

HMRC requires VAT returns quarterly (or monthly if you prefer). Light prepares your VAT return automatically:

1. Navigate to Planning & Reports → Reports

2. Select the return period. Light retrieves your open VAT obligations (filing periods, due dates, and period keys) directly from HMRC

3. Light calculates all nine boxes of the VAT return, including:

   • Total output tax (Box 1)
   • Total input tax (Box 4)
   • Net VAT owed or refundable (Box 5)

4. Review the calculation and supporting details

5. Submit the return. Light files it directly with HMRC through its MTD (Making Tax Digital) integration

Good to know: Light shows all supporting calculations so you can review the return line-by-line before submission.

# MTD integration for VAT

The UK implemented Making Tax Digital (MTD), requiring digital filing of VAT returns. Light integrates with HMRC's MTD system:

1. Connect HMRC in Settings → Integrations. Light redirects you to HMRC, where you sign in with your Government Gateway credentials and authorise Light. You authenticate on HMRC's own page, so Light receives and stores only the resulting encrypted access tokens
2. Each entity connects separately, since the connection and VAT registration number are held per entity
3. Light maintains the connection to your HMRC account, refreshing it automatically
4. When you file a VAT return in Light, it automatically submits to HMRC

When HMRC accepts the submission, Light shows a confirmation receipt (a form bundle number) at that moment. That receipt is your record of the filing, so save it at the time if you'll need it later.

# Multi-entity VAT

For companies with multiple UK entities, each entity has its own VAT registration, files its own VAT return with HMRC, and its own VAT liability. Light tracks VAT separately per entity. If your entities hold an actual VAT group registration with HMRC, talk to your Light contact about how to handle group filing, since it is not a self-service configuration in the product today.

# EU transactions and VAT

Transactions with EU counterparties involve specific VAT rules:

Purchases from EU suppliers: Request their VAT number (starts with their country code, e.g., DE, FR). If they provide a VAT number, reverse-charge applies (no VAT on purchase).

Sales to EU businesses: If the buyer provides a VAT number, supply is zero-rated (no VAT charged). Ask the customer for their VAT number before invoicing.

Sales to EU consumers: Charge your own VAT unless distance selling thresholds apply.

Light assists by requesting VAT numbers from customers and suppliers, and controls whether a reverse-charge or EU notice prints on the invoice based on the customer/supplier's country. You still need to select the appropriate reverse-charge or zero-rate tax code manually on the line.

# VAT exemption management

If you make exempt supplies (e.g., financial services, insurance), you cannot reclaim VAT on related purchases. In Light, exemption is handled through the tax code: apply an exempt tax code (EDIFACT code E, with a null or zero rate) on the relevant lines, so no VAT is calculated. The tax code you apply on each line determines the VAT treatment.

# Audit documentation

Maintain comprehensive VAT documentation:

• All invoices (sales and purchases) with VAT detail
• VAT returns submitted to HMRC
• Bank statements showing VAT payments
• Supporting schedules for major transactions

Light maintains this automatically. For auditor review, export the relevant reports individually as CSV:

1. Navigate to Planning & Reports → Reports
2. Open the report you need (e.g. VAT returns filed, trial balance, transaction detail)
3. Use the report's Export action to download it as CSV

Combine the individual CSV exports as needed for your auditor.

# Related articles

• Tax compliance — AvaTax (US)
• Audit-ready record keeping
• HMRC connection (UK)