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 me...
Last updated Feb 18, 2026 · 4 min read
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:
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).
Light requires configuration of your VAT treatment:
Once configured, Light automatically applies VAT rules to all transactions.
In Light's ledger, each tax code maps to a VAT treatment:
Standard Rate (20%):
Reduced Rate (5%):
Zero Rate (0%):
Exempt:
Reverse Charge (no VAT on purchase, VAT deferred):
Configure each tax code to map to these categories. Light then automatically applies the correct rate to transactions using that code.
When you purchase goods or services, VAT is charged. You can recover this VAT (input tax) if:
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.
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.
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.
HMRC requires VAT returns quarterly (or monthly if you prefer). Light prepares your VAT return automatically:
Good to know: Light stores all supporting calculations so you can audit the return line-by-line before submission.
The UK implemented Making Tax Digital (MTD), requiring digital filing of VAT returns. Light integrates with HMRC's MTD system:
Light maintains a record of all submissions and acknowledgments from HMRC.
For companies with multiple UK entities, each entity has its own VAT registration and VAT liability. Light:
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.
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.
If you make exempt supplies (e.g., financial services, insurance), you cannot reclaim VAT on related purchases. Configure accounts as:
Light then prevents recovery of VAT on transactions tagged to exempt categories.
Maintain comprehensive VAT documentation:
Light maintains this automatically. Export for auditor review:
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