You are classed as a ‘limited cost business’ if your goods cost less than either: 

  • 2% of your turnover
  • £1,000 a year (if your costs are more than 2%)

This means you pay a higher rate of 16.5%. You can calculate if you need to pay the higher rate and work out which goods count as costs.

If you are required to pay the higher rate of 16.5% you will currently need to make a journal correction to update the VAT control account and the VAT return as demonstrated in the steps below.

Step 1. 

Head to Reports > Popular Reports > VAT Return.

Step 2.

Fill in the relevant dates and click on the Search for invoices button.

Step 3. 

Work out the 16.5% of the total sales (including VAT) in box 6. 

Example from screenshot below:

1800 x 0.165 = 297

Step 4. 

Work out the difference between the Flat rate at 16.5% and your usual Flat rate.

Example from screenshot above:

297 - 261 = 36

Step 5.

Head to Tools > Journals > All journals.

Step 6. 

Create a journal which will Cr VAT Control (tick the show in sales check box) and Dr an income account with the difference amount. Also, fill in the accounting date and description, please see example below:

Step 7. 

If you use Clear Books to generate your VAT returns repeat steps 1 & 2.

Step 8.

Create the VAT return.

The journal should adjust the total to pay and this should be reflected in box 5 on the VAT return.