Help Center / Revenue Compliance

Tax Compliance — HMRC (UK) and VAT

Value Added Tax (VAT) is a consumption tax applied at each stage of production and distribution in the UK and EU. As the VAT framework is complex with multiple rates, exemptions, and reverse-charge mechanisms, Light automates VAT calculation, reporting, and HMRC submissions to ensure compliance.

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 on invoice amounts after discounts but before freight (unless freight is separately invoiced).

VAT configuration in Light

Light requires configuration of your VAT treatment:

  1. Navigate to Settings (gear icon in bottom-left sidebar) > Entities and add your VAT registration number to your UK entity (with or without the GB prefix — Light formats it correctly when communicating with HMRC)
  2. Navigate to Settings (gear icon in bottom-left sidebar) > 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 automatically categorized 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 automatically categorized 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 35,000 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).

Light applies reverse-charge automatically when you configure the customer or supplier as being in another EU country. You can manually override reverse-charge treatment if your specific transaction requires it.

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 stores all supporting calculations so you can audit 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 (gear icon in bottom-left sidebar) > Integrations — you're redirected to HMRC to sign in with your Government Gateway credentials and authorize Light. Light never stores your HMRC credentials, only encrypted access tokens
  2. Each entity connects separately — the connection and VAT registration number are 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

Light maintains a record of all submissions and acknowledgments from HMRC.

Multi-entity VAT

For companies with multiple UK entities, each entity has its own VAT registration and VAT liability. Light:

  • Tracks VAT separately for each entity
  • Consolidates VAT reporting across entities only if you have a VAT group registration
  • Maintains separate VAT returns per entity

If you have a VAT group (one consolidated VAT liability across entities), configure this in Light's multi-entity settings. Light then combines VAT calculations across entities for group returns.

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. If provided, it applies the correct VAT treatment automatically.

VAT exemption management

If you make exempt supplies (e.g., financial services, insurance), you cannot reclaim VAT on related purchases. Configure accounts as:

  • Exempt supply accounts: VAT-zero-rated on invoices
  • Exempt input accounts: VAT is not recoverable on purchases

Light then prevents recovery of VAT on transactions tagged to exempt categories.

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. Export for auditor review:

  1. Navigate to Planning & Reports > Reports
  2. Select period
  3. Click Export Audit Package
  4. Download PDF with all VAT transactions and calculations

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