Flat rate and reverse charge VAT in Zoho Books: the short answer
To set up flat rate and reverse charge VAT in Zoho Books, you make three choices on the VAT settings page of the UK edition. The first is accrual or cash basis. The second is whether the Flat Rate Scheme is switched on. The third is whether domestic reverse charge applies to your sales. Make all three before you raise your first invoice.
The Flat Rate Scheme is a VAT scheme in which you pay a fixed rate of VAT to HMRC. You keep the difference between what you charge customers and what you pay HMRC. In return, you cannot reclaim VAT on your purchases, except for certain capital assets over £2,000. These rules come from GOV.UK's guide to the VAT Flat Rate Scheme.
The domestic reverse charge is a rule under which the customer pays the VAT on a supply directly to the government, instead of the supplier collecting it and paying it over. In the UK, HMRC requires it for most building and construction services between VAT-registered businesses that report within the Construction Industry Scheme (CIS).
This guide covers the implementer's side of the job. It explains what each setting does in Zoho Books, where the two schemes meet in one organisation and where setups usually go wrong. Whether your business should join either scheme is a question for your accountant.
Three VAT settings a UK firm chooses when it sets up Zoho Books
Zoho Books asks a UK business to decide its VAT treatment on one settings page. According to Zoho's help page on UK VAT settings, that page applies only to customers of the UK edition of Zoho Books. If your organisation was created in another edition, you will not see these options in the same form.
The choices that shape every VAT figure afterwards are these:
- Accounting basis: accrual or cash, which decides the date VAT is counted from.
- Flat Rate Scheme: on or off, which changes what you pay HMRC and stops ordinary VAT reclaims.
- Domestic reverse charge on sales: on or off, for firms supplying construction services within CIS.
The same page also asks for your VAT registration details. Zoho Books expects the country code and the 9-digit VAT registration number that HMRC issued to you. A typo here shows on every invoice you send.
A separate option lets you trade with contacts outside the United Kingdom. Zoho's help page says enabling it handles the Reverse Charge Mechanism and Acquisition Tax. That is the cross-border reverse charge, not the domestic one for construction. Mixing the two up is a common early mistake, and it is covered later in this guide.
Accrual or cash basis: how Zoho Books dates your VAT
Accrual basis means Zoho Books calculates VAT from the date of the invoice. Cash basis means it calculates VAT from the date your customer pays you. Both definitions come from Zoho's UK VAT settings help page.
The practical difference shows up on unpaid invoices. On accrual basis, the VAT on an invoice belongs to the period of its invoice date, whether or not the customer has paid. On cash basis, the same VAT waits until the payment arrives. A business with long payment terms feels that difference in every VAT period.
The setting also changes what Zoho Books can do for you later. Zoho's October 2022 release notes say you can claim VAT on written-off invoices only if accrual based accounting is enabled for your organisation. When you make that claim, Zoho Books creates a journal entry that debits Input VAT and credits the Bad Debt account. On cash basis, that feature is not available.
Your accountant confirms which basis your business uses for VAT. The setting in Zoho Books must match it. If the basis is wrong, the VAT figures in your records will not line up with what you report, and your weekly bank reconciliation in Zoho Books will not catch it, because the bank balance is still correct.
Flat Rate Scheme rules from GOV.UK, and how Zoho Books applies them
The Flat Rate Scheme replaces the usual VAT calculation with a fixed rate. GOV.UK explains that the VAT a business pays or reclaims is usually the difference between the VAT it charges customers and the VAT it pays on its own purchases. Under the Flat Rate Scheme, you pay a fixed rate of VAT to HMRC instead, and keep the difference.
GOV.UK sets out the conditions:
- You may be able to join if your VAT turnover is £150,000 or less, excluding VAT.
- You must apply to HMRC to join.
- You cannot reclaim VAT on purchases, except for certain capital assets over £2,000.
GOV.UK also suggests you talk to an accountant or tax adviser if you want advice on whether the scheme is right for you.
In Zoho Books, the Flat Rate Scheme is a switch in VAT settings. Zoho's help page states that VAT cannot be reclaimed once you have enabled the flat rate scheme. Switch it on only after HMRC has accepted your application. Otherwise your records will stop reclaiming VAT that you are still entitled to claim.
The capital asset exception needs one extra step in Zoho Books. The October 2022 release notes say you can reclaim VAT on an item's purchase only when the item's account type is Fixed Asset. A qualifying purchase coded to an expense account will therefore not show its reclaim in Zoho Books, even though you are still entitled to it. Set up your fixed asset accounts before the first large purchase arrives.
Worked example: the same sale under standard VAT and the Flat Rate Scheme
Zoho's UK VAT help page includes a worked example that shows how the Flat Rate Scheme changes the VAT you pay. It uses a sale of three items, each carrying £20 of VAT, with a total of £360.
- Normal scheme: the VAT on the sale is £20 + £20 + £20, which is £60.
- Flat Rate Scheme: the example applies a flat rate of 14% to the £360 total, which gives £50.40.
- The difference: £60 minus £50.40 leaves £9.60.
The 14% is the help page's illustration, not a rate to copy. Your own rate depends on your type of business, so confirm it with your accountant.
GOV.UK's rule explains what happens to the £9.60. Under the Flat Rate Scheme, you keep the difference between what you charge your customers and what you pay HMRC. The customer in this example still pays £360. You pay HMRC £50.40 and keep the rest.
The trade-off sits on the purchase side. On the normal scheme, you would also reclaim the VAT on your own purchases. On the Flat Rate Scheme, you cannot, unless the purchase is a qualifying capital asset over £2,000. Before you switch the scheme on, ask your accountant to run this comparison with your real sales and purchases. In Zoho Books, the switch changes how every later transaction is treated.
Domestic reverse charge for construction: which services it covers
The domestic reverse charge applies to most supplies of building and construction services, according to HMRC's guidance on the domestic reverse charge for construction. It started on 1 March 2021, after HMRC moved the start date twice, first from 1 October 2019 to 1 October 2020, then to 1 March 2021.
The charge applies to standard and reduced rate VAT services between businesses registered for VAT in the UK and reported within CIS. HMRC's list of services matches the CIS list of construction operations, with one exception: supplies of workers provided by employment businesses.
HMRC's examples of services that must use the reverse charge include:
- installing heating, lighting, air-conditioning, ventilation, power supply, drainage, sanitation, water supply or fire protection systems in any building or structure
- painting or decorating the inside or the external surfaces of any building or structure
HMRC also lists services where the reverse charge must not be used when they are supplied on their own:
- the professional work of architects, surveyors, and building, engineering, interior or exterior decoration and landscape consultants
- installing security systems, including burglar alarms, closed circuit television and public address systems
If the reverse charge does not apply, HMRC says you follow the normal VAT rules and procedures. Deciding which of your services fall inside the scope is the accountant's job. Recording that decision correctly is the job of your Zoho Books setup.
Turning on domestic reverse charge for sales in Zoho Books
Domestic reverse charge on sales is off by default in Zoho Books, and you switch it on in VAT settings. Zoho's guidance on domestic reverse charge in the UK edition gives the step: check the Enable Domestic Reverse Charge in Sales transactions option.
Once the option is on, you apply the reverse charge on the invoice itself. Zoho Books then behaves in a specific way. The VAT rate still appears on the item, but it is not added to the total you collect from the customer. The customer sees the VAT treatment on the invoice and pays you the net amount.
Zoho's guidance describes two default behaviours you should know before your first live invoice:
- By default, domestic reverse charge applies to services covered under CIS.
- If an invoice contains both CIS and non-CIS services, domestic reverse charge still applies to it.
The second point matters for firms that sell a mix of work. The VAT treatment follows the supply, not the invoice: HMRC normally applies the reverse charge to everything supplied together with reverse charge services. If the reverse charge part is 5% or less of the contract value, you and your customer can agree to use normal VAT instead. You make that agreement at the start of the contract. It is optional, and it is never worked out invoice by invoice. If your accountant confirms that a separate supply should carry normal VAT, raise it on its own invoice.
HMRC's guidance asks businesses to make sure their accounting systems and software can deal with the reverse charge. In Zoho Books, that means the option is enabled, your items are set up correctly and your staff know which invoices need it.
Where the Flat Rate Scheme and domestic reverse charge meet in one organisation
A small construction subcontractor can need both schemes in the same Zoho Books organisation. The Flat Rate Scheme switch and the domestic reverse charge option sit on the same VAT settings page. Nothing in Zoho Books stops you from turning both on.
The cash effect of combining the two schemes is the first thing to understand. On a reverse-charged sale, Zoho Books does not add VAT to the total you collect from the customer. So there is no VAT charged to that customer for the flat rate margin to come out of. A subcontractor whose sales are mostly reverse charged will not see the margin that the worked example showed.
HMRC says reverse-charged sales are excluded from the Flat Rate Scheme, so you leave their value out of your flat rate calculation. If you receive reverse-charged services, you account for and reclaim that VAT on the same return. A subcontractor whose sales are mostly reverse charged should ask its accountant whether the scheme is still worth staying in. Ask before go-live, not after the first return.
Once you have the answer, test it in Zoho Books. Raise a reverse-charged invoice and a normal invoice. Then check the VAT figures that each produces against what your accountant expects. If they differ, fix the settings before any customer sees an invoice.
Setup checklist: each VAT setting, who decides it and what breaks if it is wrong
The table below lists each VAT choice in Zoho Books, who should make it and the typical symptom when it is wrong. Work through it with your accountant before the first invoice.
| Setting in Zoho Books | Who decides | What breaks if it is wrong |
|---|---|---|
| VAT registration number | HMRC issues it; you enter the country code and 9 digits | The wrong number prints on every invoice |
| Accrual or cash basis | Your accountant | VAT falls in the wrong period; written-off invoice VAT claims need accrual |
| Flat Rate Scheme | You apply to HMRC; your accountant advises | VAT reclaims stop too early, or continue when they should not |
| Capital asset purchases | Your accountant, against the £2,000 rule | Reclaims are lost if the item is not on a Fixed Asset account |
| Domestic reverse charge on sales | Your accountant, against HMRC's service list and each customer's VAT and CIS registration and any written end user or intermediary notice | VAT is collected from a customer who should account for it, or the reverse |
| Trade with contacts outside the UK | Your accountant, for cross-border trade only | Cross-border reverse charge is switched on for a domestic problem |
Every row has an owner outside Zoho Books. The implementer's job is to make the software match the owner's decision and to prove it with test transactions.
Where Zoho Books VAT setups usually break, and how to check them
Most VAT setup problems in Zoho Books come from a correct decision entered in the wrong place, not from a wrong decision. At Svennis we raise a test invoice of each type in a new organisation, standard, reverse charged and mixed, and compare the VAT figures with the client's accountant before any live invoice goes out.
The breaks we look for first are these:
- Flat Rate Scheme switched on before HMRC accepted the application. Reclaims stop on purchases that still qualified.
- Capital purchases coded to an expense account. Zoho Books reclaims VAT under the scheme only on Fixed Asset accounts.
- The outside-UK trade option used for construction. That option handles the cross-border reverse charge and acquisition tax, not the domestic charge.
- Mixed invoices. Domestic reverse charge applies to the whole invoice when CIS and non-CIS services share it.
- Basis mismatch. Zoho Books runs on accrual while the business accounts for VAT on cash, or the reverse.
Bills deserve the same check as invoices. If you capture supplier bills automatically, read our guide to keeping VAT lines right with Autoscan in Zoho Books. Under the Flat Rate Scheme, a bill with a reclaim on an ordinary expense is a sign the setup is wrong.
Agents need one more step. Zoho's help page says an agent filing VAT returns through Zoho Books needs approval from the organisation's admin first. Arrange that approval during setup, not on deadline day.
What flat rate and reverse charge VAT mean for a UK construction or service business
For a UK business, both schemes change cash flow as well as bookkeeping. HMRC's reverse charge guidance asks affected businesses to check how the charge will affect their cash flow. It also asks them to make sure the staff responsible for VAT accounting are familiar with it. A subcontractor that no longer collects VAT on most invoices has less cash passing through its account between returns.
The Flat Rate Scheme has its own limit. GOV.UK says you may be able to join if your VAT turnover is £150,000 or less, excluding VAT. A growing firm near that figure should ask its accountant how long the scheme will remain available to it. Then plan the Zoho Books change in advance.
Zoho Books covers both schemes in the UK edition, along with the basis choice and cross-border trade. Our overview of Zoho Books for UK businesses explains what else the UK edition handles. What it cannot do is decide your VAT position. That decision stays with your accountant and HMRC, and the software records it.
In practice, a UK firm needs three things in writing before setup:
- the VAT accounting basis it uses
- confirmation that HMRC accepted any Flat Rate Scheme application
- a list of which of its services fall inside the domestic reverse charge, and a record of each customer's VAT and CIS status and any written end user or intermediary notice
Next steps for your Zoho Books VAT setup
The next step is to collect your accountant's decisions and then configure Zoho Books in one sitting. Work in this order:
- Ask your accountant to confirm your VAT basis, your Flat Rate Scheme status and which of your services are reverse charged.
- Enter your country code and 9-digit VAT registration number in VAT settings.
- Set accrual or cash basis to match your accountant's answer.
- Switch on the Flat Rate Scheme only after HMRC has accepted you, and create Fixed Asset accounts for capital purchases.
- Check Enable Domestic Reverse Charge in Sales transactions if you supply construction services within CIS.
- Raise a test invoice of each type and compare the VAT figures with your accountant.
- Arrange admin approval for any agent who will file your VAT returns.
Leave the outside-UK trade option off unless you trade across borders. Review your first VAT period with your accountant before you treat the setup as finished.
If you want help with the configuration or the checks, our page on Zoho Books partner services explains what support looks like after the initial setup. You can also read about how we work as a Zoho partner in the UK.