How do I record income from mixed VAT and non-VAT sales?

Understanding what “mixed VAT and non-VAT sales” really means

Many businesses don’t live in a neat, all-VAT or no-VAT world. You might sell standard-rated goods alongside zero-rated items, provide VAT-exempt services alongside taxable services, or sell to different customer types and locations that change the VAT treatment. When you hear the phrase “mixed VAT and non-VAT sales,” it usually means your income includes a combination of:

VAT-taxable sales (where VAT is chargeable at a rate such as standard, reduced, or zero) and non-VAT sales (commonly exempt supplies or out-of-scope income). The key thing to remember is that “non-VAT” can mean different things in practice:

Zero-rated sales are still VAT-taxable (the VAT rate is 0%), which often means you can still recover input VAT related to those sales, subject to the usual rules.

Exempt sales are not VAT-taxable, and this often restricts your ability to recover input VAT related to making those exempt sales.

Out of scope income sits outside the VAT system altogether (for example, certain grants or donations, depending on circumstances), which may be treated differently again for input VAT recovery and reporting.

For income recording purposes, the principle is simple but important: you should record your sales in a way that clearly distinguishes the VAT element (if any) from the net income, and you should also distinguish between different VAT treatments so your VAT return and financial reporting remain accurate.

Two separate questions: accounting income vs VAT reporting

When people ask how to record income from mixed VAT and non-VAT sales, they’re often mixing two related but distinct tasks:

1) Accounting for income in your bookkeeping system (what hits your revenue accounts, what hits VAT liability accounts, and what hits customer balances).

2) Reporting VAT correctly (so your outputs are in the right boxes, your VAT liability is accurate, and your audit trail shows why you treated something as taxable, exempt, or out of scope).

You can do “good bookkeeping” and still have VAT trouble if you don’t segment sales by VAT treatment. Likewise, you can file VAT returns correctly but end up with confusing management reports if you lump everything into a single revenue category without detail. The best approach is to design your chart of accounts (or your product/service tax codes) so the accounting and VAT reporting align naturally.

The foundational rule: split each sale into net and VAT (when VAT applies)

For VAT-taxable sales (standard-rated, reduced-rated, and zero-rated), your recordkeeping should reflect:

Net sales: the value of the goods/services before VAT.

VAT output: the VAT you charge customers (except zero-rated, where the VAT is zero).

Gross invoice total: the amount the customer pays (net + VAT for standard/reduced; net only for zero-rated).

If you issue an invoice for a standard-rated sale of £1,000 net at 20% VAT, the gross is £1,200. Your bookkeeping typically records:

Debit Accounts Receivable (or Bank if paid immediately): £1,200

Credit Sales (net revenue): £1,000

Credit VAT Output (VAT liability): £200

This split is what allows you to reconcile your VAT return to your accounting system and your customer balances. The same logic applies even if your business sells a mix of VAT and non-VAT items—each line (or each invoice) must be treated according to its VAT status, and your system should be capable of capturing that.

Why “non-VAT” needs careful classification

If a sale is exempt or out of scope, you generally do not post anything to VAT output. But the category matters because it affects VAT reporting and potentially input VAT recovery:

Exempt sales: You record the income as revenue, but no VAT output is created. However, your bookkeeping should still identify that income as exempt to support your partial exemption calculations (if relevant) and to demonstrate correct treatment.

Out-of-scope income: Again, you record the income as revenue (or another appropriate income category), but it’s not VAT-taxable. Depending on the nature of the income, you may keep it separate because it may not belong in VAT return outputs and may have different implications for VAT recovery.

Zero-rated sales: These are VAT-taxable at 0%. You still treat them as taxable supplies for many VAT purposes, and they usually go into VAT reporting as taxable turnover, even though the VAT output is zero. This is a common source of mistakes: people label zero-rated as “non-VAT” and then misreport taxable turnover.

The practical takeaway: build your bookkeeping structure around VAT treatments, not around the vague idea of “VAT vs non-VAT.”

Design your bookkeeping system: tax codes, products, and revenue accounts

Most modern accounting systems work best when you define VAT treatments using tax codes (or tax rates) attached to products and services. Instead of manually calculating VAT each time, you assign a VAT code like “Standard-rated 20%,” “Reduced 5%,” “Zero-rated 0%,” “Exempt,” or “Out of scope.” The software then posts the net and VAT portions to the correct places.

If you’re using spreadsheets or a simpler ledger, you can still apply the same logic. The key is to be consistent and to preserve an audit trail.

At minimum, you want to be able to produce reports that show, separately:

Taxable sales at standard rate (net and VAT)

Taxable sales at reduced rate (net and VAT)

Taxable sales at zero rate (net only, VAT zero)

Exempt sales (gross equals net, no VAT)

Out-of-scope income (gross equals net, no VAT)

Sometimes you can do this with separate revenue accounts. Sometimes you do it with a single revenue account but separate VAT codes and reporting tags. In practice, many businesses do both: they keep revenue accounts for management reporting (e.g., “Product Sales,” “Service Income,” “Shipping Income”) and rely on VAT codes for tax reporting segmentation.

Recording invoices that contain both VATable and non-VAT lines

It’s very common to issue one invoice that includes multiple lines with different VAT treatments. For example, a retailer might sell a mix of standard-rated items and zero-rated items in a single transaction. Or a professional firm might invoice for a taxable consulting service and an exempt item such as certain financial services (depending on the firm’s activities).

The correct approach is line-by-line VAT treatment. Each line on the invoice should carry its own VAT code. Your accounting entry is still one receivable total, but behind the scenes the software splits revenue by tax code and posts VAT only on the taxable lines that attract VAT.

From a bookkeeping point of view, you’ll see something like:

Debit Accounts Receivable: total gross amount

Credit Revenue accounts: the net amount split across VATable and non-VAT lines

Credit VAT Output: VAT on the VATable lines only

This approach reduces errors because you don’t have to “average” VAT across the invoice. It also creates a much clearer audit trail if you’re ever asked why VAT was charged on some components but not others.

Handling till sales and daily takings with mixed VAT treatment

Retail and hospitality businesses often record sales as daily totals rather than item-by-item invoices. When you have mixed VAT and non-VAT sales, daily takings must still be analysed by VAT treatment. Otherwise, you can’t calculate output VAT correctly.

A sensible daily process is to extract a sales summary from your point-of-sale system that breaks sales down by VAT rate and classification. Many POS systems can provide totals like:

Gross sales at standard rate

Gross sales at reduced rate

Gross sales at zero rate

Exempt sales

Out-of-scope (if applicable)

Then, for standard and reduced rate totals, you convert gross to net and VAT using the VAT fraction. For example, at 20% VAT, the VAT fraction is 1/6 of the gross (because gross = net × 1.20, so VAT = gross × 20/120 = 1/6). Your bookkeeping for a day’s takings may include:

Debit Bank/Cash: total takings

Credit Sales (net): net sales by category

Credit VAT Output: total VAT on standard/reduced takings

For zero-rated and exempt/out-of-scope totals, you typically credit the sales account with the gross (because VAT is zero), but you still keep the classification clear so reporting remains correct.

Reconciling gross vs net: avoid the “VAT included” trap

A common mistake in mixed sales environments is mixing up whether recorded amounts are gross or net. This happens often when:

Prices are shown to customers as VAT-inclusive, but the bookkeeping is set up to record net sales, or vice versa.

A staff member exports a sales report that already splits net and VAT, but then someone applies VAT fractions again, effectively double-counting VAT.

Some sales are invoiced net + VAT, while others are priced VAT-inclusive at the till.

The way out is to standardise your workflow. Decide, for each sales source (invoices, POS, online store, third-party marketplaces), whether the incoming data you import is gross or net. Then make sure your VAT calculations and postings reflect that consistently.

If you import gross totals, calculate net and VAT using the correct fraction for each VAT rate. If you import net totals, calculate VAT by applying the VAT rate to net.

Write this down as a procedure. That single step—documenting your process—dramatically reduces month-end confusion.

Mixed VAT status doesn’t always mean mixed VAT rates

Sometimes “mixed VAT and non-VAT” is not about multiple VAT rates; it’s about being partially exempt because you make both taxable and exempt supplies. In those cases, the sales recording challenge is not only output VAT—it’s also how those sales influence your ability to reclaim input VAT.

Even if you charge VAT correctly on taxable sales and charge no VAT on exempt sales, you may need additional tracking to support partial exemption calculations. That’s because input VAT on costs that relate to both taxable and exempt activities may need to be apportioned.

While the mechanics of partial exemption can be complex, your income recording needs to support it by allowing you to identify your taxable turnover and exempt turnover for the relevant periods. That usually means your system must be able to report sales totals by VAT classification, not just by product line.

How to structure revenue accounts for clarity

There are many valid ways to set up your chart of accounts. The best structure is the one that supports your VAT reporting, management reporting, and operational workflow without becoming overly complicated.

Here are three common patterns:

Pattern A: One revenue account, multiple VAT codes

This is the simplest. You post all sales into a single revenue account like “Sales Income,” and rely on VAT codes to split taxable, zero-rated, exempt, and out-of-scope in VAT reports. This can work well for small businesses that don’t need granular management reporting.

Pattern B: Revenue accounts by product/service line, VAT codes for tax treatment

You might have “Consulting Income,” “Training Income,” “Product Sales,” and “Shipping Income.” Each line uses VAT codes as appropriate. This is common because it supports management reporting while still allowing VAT reporting to be driven by the tax code.

Pattern C: Revenue accounts by VAT treatment

You maintain separate accounts such as “Sales – Standard Rated,” “Sales – Zero Rated,” “Sales – Exempt,” and “Sales – Out of Scope.” This can make VAT reporting and reviews very straightforward, but it can become unwieldy if you also want product/service reporting. It’s often used where VAT compliance is the dominant concern.

For many businesses, Pattern B is the sweet spot: management-friendly revenue categories plus VAT codes for tax compliance.

Customer payments: what changes when sales are VATable vs non-VAT?

From a payments perspective, not much changes. The customer pays the invoice total or the till total. Your bookkeeping records the payment against the customer account or directly to income if you’re using cash accounting and immediate sales recognition.

The important difference is what the payment represents. If VAT applies, part of the money you receive is not “yours” in an economic sense—it’s VAT you’ve collected on behalf of the tax authority. That’s why it belongs in a VAT liability account until you report and pay it.

When sales are exempt or out of scope, there is no VAT element to separate, which can make cash flow look deceptively strong compared to VATable sales. That’s another reason to segment your sales: understanding how much of your cash receipts are VAT liabilities helps you avoid unpleasant surprises at VAT return time.

Discounts, refunds, and credit notes across mixed VAT treatments

Adjustments are another area where mixed VAT and non-VAT sales can cause errors. The rule of thumb: the VAT treatment of the adjustment should follow the VAT treatment of the original sale.

Discounts at point of sale typically reduce the taxable amount before VAT is calculated (unless the system handles it differently in a specific way). If the underlying item is standard-rated, the discount reduces both net revenue and VAT output proportionally. If the item is zero-rated, there is no VAT impact. If it is exempt or out of scope, again there is no VAT impact, but you still reduce income appropriately.

Refunds and credit notes should mirror the original invoice lines with the same VAT codes. A credit note for a standard-rated sale reduces VAT output as well as net sales. A credit note for an exempt sale reduces income without affecting VAT output.

If you process refunds in bulk, ensure your reporting still splits them by VAT treatment. Otherwise, you can end up with VAT output that doesn’t reflect reality, particularly if standard-rated items are refunded but the system records all refunds as a single gross figure.

Shipping, delivery, service fees, and tips: don’t forget the “extra” income

Businesses often think only about the main product or service, but mixed VAT issues frequently arise in “extra” income streams such as:

Delivery charges

Shipping and handling

Booking fees

Service charges

Commission income

Cancellation fees

Tips and gratuities (treatment can vary based on how they’re collected and distributed)

Each of these has its own VAT logic depending on jurisdiction and circumstances, and many systems default them to standard-rated. If any of these are exempt, zero-rated, or out of scope in your situation, you must set up separate VAT codes and income categories. In practice, this usually means setting up products/services in your accounting or POS system like “Delivery Charge – Standard Rated” or “Service Fee – Exempt,” rather than leaving them as a generic fee line.

Cash accounting vs invoice accounting: does the recording change?

Whether you account for VAT on an invoice basis or cash basis can affect when VAT becomes due, but it doesn’t change the need to record sales correctly by VAT treatment. The core requirement remains: every sale must have the correct VAT classification, and VATable sales must be split into net and VAT amounts.

Under invoice-based VAT accounting, you typically recognize VAT output when you issue the invoice (or when you deliver the supply, depending on local rules). Under cash accounting schemes, VAT output might become due when you receive payment. But even then, your accounting system still needs to track the VAT component so it becomes reportable at the correct time.

To keep your records clean, ensure your system is configured for the VAT scheme you’re using. Otherwise, you might post everything correctly at the transaction level and still see VAT timing mismatches in your return calculations.

Practical workflow: a step-by-step method to record mixed sales cleanly

Here’s a practical approach you can apply whether you use accounting software or spreadsheets:

Step 1: List all income streams

Write down every way your business earns money: products, services, subscriptions, shipping, fees, commissions, grants, and anything else. This is where “surprise” non-VAT income usually hides.

Step 2: Assign a VAT treatment to each stream

For each income stream, decide whether it is standard-rated, reduced-rated, zero-rated, exempt, or out of scope. If you’re uncertain, treat this as a compliance decision to resolve before you build your bookkeeping around it.

Step 3: Set up VAT codes and items

In your system, create VAT codes that match your treatments. Then attach them to your products/services so sales are automatically coded correctly.

Step 4: Set up revenue accounts that support reporting

Decide whether you want revenue split by product lines, VAT treatment, or a combination. Keep it simple enough that staff can code transactions correctly without constant supervision.

Step 5: Record sales at the right level of detail

Invoices: line-by-line VAT codes.

POS daily totals: split totals by VAT treatment.

Marketplace payouts: reconcile fees, returns, and VAT treatment carefully, because payouts often net off commissions and refunds.

Step 6: Reconcile VAT outputs regularly

Don’t wait until the VAT return deadline. Each month (or each week for high-volume businesses), reconcile sales by VAT code to ensure your VAT output account makes sense.

Step 7: Lock down your process

Once you have a workflow that works, document it and train anyone who touches sales entry. Most VAT errors come from inconsistent processes, not from complicated VAT law.

Example: a business with standard-rated goods, zero-rated goods, and exempt services

Imagine a business that sells:

Standard-rated goods (20%)

Zero-rated goods (0%)

An exempt service

During the month, it issues invoices and records POS sales. The bookkeeping system should show sales broken out by VAT code:

Standard-rated sales: net sales amount and VAT output posted separately.

Zero-rated sales: net sales amount posted, no VAT output.

Exempt income: income posted, no VAT output, but clearly tagged as exempt.

At VAT return time, the business can report taxable turnover (including standard-rated and zero-rated sales) and VAT due on outputs (from standard-rated sales). Exempt income is tracked for the business’s VAT profile and any partial exemption considerations, but it is not treated as taxable turnover.

The key point: you didn’t need to do anything special beyond correctly coding each sale. The “mixed” nature of the business is handled automatically by good categorisation.

Common mistakes and how to avoid them

Mistake 1: Treating zero-rated as “non-VAT” and excluding it from taxable turnover reporting

Fix: Use a specific VAT code for zero-rated, not a generic “No VAT” code, and confirm your VAT report treats it as taxable at 0%.

Mistake 2: Using one “No VAT” code for both exempt and out-of-scope income

Fix: Separate codes. Exempt and out of scope may affect VAT recovery and reporting differently.

Mistake 3: Recording gross sales as revenue and then also recording VAT output separately

Fix: Revenue should be net of VAT for VATable sales. The VAT element belongs in VAT output, not in revenue.

Mistake 4: Applying VAT fractions to figures that are already net

Fix: Standardise whether your reports are gross or net, and avoid double-calculating.

Mistake 5: Not splitting daily takings by VAT treatment

Fix: Configure POS reporting to provide VAT-rate summaries and post based on those summaries.

Mistake 6: Not mirroring VAT codes on credit notes

Fix: Credit notes should replicate the original invoice line VAT coding so VAT is reversed correctly.

Internal controls that make mixed sales much easier

You don’t need a large finance team to stay on top of mixed VAT and non-VAT sales. A few simple controls go a long way:

Locked VAT codes on products/services so staff can’t accidentally select the wrong tax treatment.

Monthly review of sales by VAT code to spot unexpected shifts (e.g., exempt sales suddenly spiking because a product was miscoded).

Reconciliation of VAT output account so the balance trends match reported VAT due on sales.

Exception reporting for transactions coded “out of scope” or “exempt,” especially if those are less common.

Clear documentation describing which income streams map to which VAT codes and why.

What your management reports should show

Beyond compliance, proper income recording helps you understand performance. For mixed VAT and non-VAT businesses, consider management reports that show:

Net sales by product/service category

Sales volume by VAT treatment (standard, reduced, zero, exempt, out of scope)

Gross margin by category (net of VAT, so margins aren’t distorted)

VAT collected (output VAT) trend over time

Cash received vs VAT liability (to plan payments)

When you can see, at a glance, how much of your turnover is taxable vs exempt, you can also anticipate whether VAT recovery restrictions might be material and whether pricing and product mix changes will affect cash flow.

How to check your work: a simple end-of-period sanity test

At the end of each period, do a quick sanity check:

1) Does total gross income equal total net income plus VAT output for VATable sales?

Remember: exempt/out-of-scope income has no VAT output, so gross equals net for those items.

2) Does VAT output roughly align with your standard/reduced-rated sales?

If standard-rated sales are £60,000 net, you would expect output VAT of about £12,000 at 20%, subject to discounts, returns, and timing schemes. A large mismatch is a red flag.

3) Are zero-rated sales showing up as taxable at 0% rather than disappearing?

This is a common reporting issue when tax codes are not set up correctly.

4) Are exempt sales clearly identifiable?

If your system can’t easily total exempt sales, you are likely to struggle later with VAT position reviews and any partial exemption needs.

This kind of simple review is not about perfect precision—it’s about catching obvious coding errors early, when they are easiest to fix.

When mixed VAT and non-VAT sales signal a need for extra VAT attention

Sometimes mixed sales are a routine situation; other times they indicate your VAT position could be more sensitive. You may need tighter processes if:

You are making a significant amount of exempt supplies relative to taxable supplies.

Your product mix changes often, and VAT treatment differs across products.

You sell across borders or through marketplaces, and VAT rules vary by customer location.

You bundle products and services where VAT treatment may depend on what is “principal” vs “ancillary.”

You regularly issue refunds, discounts, or credits that can shift VAT outputs materially.

In these cases, recording income correctly is still the starting point, but you may also need more robust review procedures to ensure the VAT treatment you’re applying is consistently correct across the business.

Summary: the clean way to record mixed VAT and non-VAT income

Recording income from mixed VAT and non-VAT sales is straightforward when you build your records around VAT treatment and keep net and VAT separated for VATable supplies. The core practices are:

Use distinct VAT codes for standard, reduced, zero-rated, exempt, and out-of-scope income.

Record VATable sales as net revenue plus VAT output, not as gross revenue.

Code invoices line-by-line and split POS totals by VAT treatment.

Mirror VAT treatment on refunds and credit notes.

Review sales by VAT code regularly and reconcile your VAT output account.

With those foundations in place, mixed VAT and non-VAT sales stop being a bookkeeping headache and become simply another well-organised dimension of your sales reporting.