VAT - setting up the system and making entries    


As with all previous versions of our software C-Law enables you to enter up VAT and to compile reports as needed ready for you to enter onto your VAT return sheets.

C-Law keeps VAT sheets as part of the system and these show all the VAT entries you make. There is also a Customs and Excise nominal ledger account which is used to record payments of VAT (or receipts of VAT) to (or from) HMRC (previously known as H.M.Customs and Excise) referenced to your office bank - usually O1. By making an appropriate V1 entry on this ledger to balance off the O1 entry you can also record the payment (or receipt) to or from Customs and Excise on the VAT sheets so that these show you at any time the VAT situation and how much is owed.

If you have set up a cash VAT basis then you have a V8 sheet which is reserved for entries of VAT entered and VAT paid. Unmatched entries on the V8 sheet mean that VAT has been entered as due but not yet paid (or recorded as paid).

Note:  C-Law has a fixed inbuilt nominal a/c numbered 3 and as supplied is labelled CUSTOMS AND EXCISE. The name can if you wish be changed to HMRC or something similar. But this No 3 a/c is ALWAYS the one used with the VAT system and is the one used for paying VAT to HMRC and recording the payment on the VAT sheet by a balancing V1 entry.  You CANNOT make such entries on any other nominal. If you do there is a high risk that the VAT report will become erronous 

Setting up the VAT system with your chosen settings


The VAT system settings and parameters can be checked and/or changed by going to the VAT report screen and choosing the menu item 'Settings' and then the sub menu item 'VAT parameters and settings'

This will show you a screen similar to this:-

On this screen the following items need to be checked, set up, or defined:-

(1)   Tick if the firm is VAT registered. No tick if not registered (If unticked no VAT entries will be prompted)

(2)   Vat Number

(3)   Last date of the current VAT accounting period. This is the date that the period ends - not the date of the VAT return itself.

(4)   Length in  months for the VAT accounting period - usually quarterly - ie: 3 

(5)   The VAT rate - 17.5% currently

(6)   Show reminder whether VAT report is due. If you elect to be reminded by clicking the check box then you will on every dail;y startup be told then the next VAT return is due and/or whether it is overdue

 (7)   Dating of VAT entries.

Whether VAT returns are based on the actual 'current' date in C-Law of the VAT entry or the actual date put of the entry. For example you could have an entry made on the C-Law date of operation for the 25th August where the actual date of the bill and the VAT entry made had been entered up as the 10th August. If the first option is selected the entry will be recorded as being on the 25th August in the report.  If the second option is chosen the entry will be recorded as being made on the 10th August.

(8)  Accounting Basis - Whether VAT becomes due when a Bill is delivered (Bills Delivered) or when the Bill is paid (Cash)

Bills delivered or Cash basis for VAT?

The system usually used by most lawyers firms is a bills delivered basis. The amount of book keeping time and internal office procedures are minimised by using this method. Although it may seem emotionally desirable to pay on a cash basis it has to be said that for most law firms this produces few if any benefits. There are usually few regular bad debts or failures to pay lawyers bills. So whether on a bills delivered or a cash basis the quarterly VAT payment will usually be found to be very much the same. (There is of course an apparent saving of some money when transferring from bills delivered to cash (even a refund) but this is for one quarter only and is a very transitory benefit!). The downside of a cash basis is that the book keeper has to make more entries and there is the risk of fee earners not telling the book keeper when bills are paid and consequent incorrect or invalid office column entries on client ledgers.


For those firms who for their own reasons need to go onto a cash basis C-Law has a built in Cash Mode to enable this to be done. This is selected from the Cashier drop down menu on the main screen.

When activated the effect is that two VAT and Bill sheets in the system are set up as "holding sheets" for Bill and VAT entries. These are the sheets referenced B8 and V8 and when cash mode is selected they will be used by default for bill or VAT entries on client ledger sheets. This can be overridden (and should be when the bill is being paid instantly eg: in conveyancing matters on completion) and B1 and V1 can be 'forced'. When B8 and V8 entries are made the matter summary screen shows outstanding costs and VAT in a separate field.

When the bill is eventually paid by a credit to the office column on any client matter an internal transfer has to be made of the B8 and V8 entries onto the B1 and V1 sheets. (This will ensure the VAT gets put through onto the VAT return). C-Law prompts for this internal transfer whenever a credit entry takes place and there are outstanding costs or VAT present on the client matter. A transfer screen appears where the desired internal transfer can be quickly set up (most entry fields are already pre filled) to avoid the book keeper having to do this manually or make multiple entries. There is also a built in facility for activating this transfer screen at any time manually (in case a mistake has been made etc).

It has to be said however that however much this may help the book keeper, Cash Mode inevitably involves more work and for most firms a Bills Delivered mode will be the one chosen.

There is a separate page in this manual which describes using 'cash received' VAT mode in much more detail. Click here to view this.


Making individual VAT entries

Whenever you wish on either Client or Nominal Ledgers you can make a VAT entry. The internal journal code for the VAT sheets is (normally) V1. However with VAT entries you have to show the amount on which the VAT is paid (or received) and this is put in the details column.

For example a simple VAT entry would read:-

The gross amount on which the VAT is paid or received is shown in the details as 100.00. The amount must be shown. As from Dec 2008 C-Law prompts a VAT entry with the VAT rate (as shown above) which we suggest you may wish to use.

Note you must always include a decimal point and pence to two decimal places in the gross figure.  This is because during the daily closedown C-Law writes up the VAT report sheets (as distinct from the VAT sheets) and these need to record the amounts on which VAT is paid and received as well as the VAT itself. If the gross amount is not recorded properly in the details column you will usually be warned by C-Law.

After costs entries on the Client ledger or any entry on a nominal on which you have stated that VAT is payable you will get a prompt asking you if you wish to enter VAT

and if so at what rate - standard or non standard or zero.

If you choose non-standard you will be able to enter the percentage in a dialogue box which appears as follows:-.

Whichever you choose (other than NO VAT) the VAT entry will be created and the fields on the screen populated with the data for you to confirm.

Or you can make a totally manual entry at any time.

Mistakes in VAT entries

If you make a mistake in a VAT entry and realise too late to change it before it is entered then you will need to make a contra entry. It is very important that you make a contra entry with the word CONTRA as the first word in the details. The software recognises this as a correction and will show the VAT as a negative input or output. For example to contra off the entry shown above you would put

Note that the Vat of 17.50 is in the receipt column (assuming previously it was in the payment column). If the word contra appears with an entry in the receipt column the entry is shown on the VAT sheets as negative output tax (which it is) rather than input tax. If you forget to use CONTRA the amount due or reclaimed for VAT is unaffected - so no great harm is done - but the overall figures for outputs and inputs and output and input tax will not be correct and H.M.Customs may not be over impressed if they do an audit!

VAT details

The VAT entries which you make also serve the purpose of recording the total gross amount on which the VAT is either being paid or received and this is displayed whenever you ask for a VAT report.

A VAT report can be generated almost instantly and contains all the details which you need to put onto your VAT return.

The VAT system operates in conjunction with a Customs and Excise ledger sheet (the predecessor to HMRC) which is used to record payments of VAT (or a refund) and on which a matching entry is made to record the payment (or received) of VAT on to the VAT sheet by (usually) a matching V1 entry. For example:-



These matching pairs of entries will keep the ledger balance as zero.  The second entry will debit the VAT sheet with the payment so your VAT balance due on the VAT sheet will always show correctly as the actual amount due (or reclaimable).


Whenever you generate a VAT report you will need to tell C-Law 2k whether this is a final report which is being submitted to HM Customs (HMRC). If you tell it that it is a final report then it will save the entries into a separate file which is then archived and can be subsequently recalled for inspection but no new entries can be made onto it. The object of this is to ensure the that you cannot accidentally ( more deliberately ) invalidate a VAT return which you have sent to HM Customs (HMRC)

Any new entries that you make thereafter will go into a fresh report. This feature ensures that your VAT returns to HM Customs (HMRC)  are always accurate even if you backdate entries onto a ledger account since they cannot fall within an earlier report period and will be picked up on the next VAT return.

Most firms will only need one VAT sheet although C-Law 2005 and upwards will allow you to have up to eight separate sheets. The normal VAT sheets has a journal code of V1. This journal code must be used whenever you make a VAT entry.


Showing payment of VAT on Client Ledger sheets


If you are paying for example Counsels fees on Client Bank and you need to separate out the VAT to charge the client so it can be reclaimed the entries would be:-


Office Column Client Column

A.BARRISTER - CNSLS FEES             C1           117.50

.                   VAT PAID AT 17.5% ON 100.00           V1                                 17.50


Then when you later bill the client you would enter:-

OUR COSTS                                      B1                      200.00

VAT ON 200.00                                  V1                        35.00

VAT ON 100.00 CNSL FEES            V1                        17.50

In this way you have matched the inputs and outputs.

The golden rule for disbursements with VAT is that if you reclaim VAT on paying it you must then (or later) debit the output VAT to the client.

Of course if the client is not VAT rated you may prefer not to claim or charge VAT - you would then leave out BOTH V1 entries. But DON'T MIX the two.  If you show input tax then you MUST record output tax.

Some firms charge a pseudo CHAPS fee to clients. We say suedo since it is a firms charge and not a disbursement incurred. In such a case the CHAPS fee can be debited by OT entry to a CHAPS nominal account. Actual amounts paid to the Bank could be debited to this leaving you with a net "profit" at the end of the financial period. The VAT must then be entered manually (an OT entry will not prompt a VAT entry). You would enter it up just like VAT on a bill.

Or you could set up a second bill sheet B2 and put all Chaps fees through as a B2 entry - the VAT entry will then be prompted for you. But you cannot enter bank charges paid against this.

Automated VAT entries for vatable disbursements

On Client ledger matters it is becoming more necessary to have to show VAT on disbursements, if only because some legal services for which you pay need to be charged to clients and include a VAT element.

When any entry is made on office column of a client ledger involving a payment out of office bank (or petty cash) the prompt that appears when the entry has been accepted has a middle button VAT ENTRY option - as shown below.


In this example a vatable disbursement has been paid of £75.00 plus VAT by a cheque on the office bank.  Having confirmed the entry a prompt appears asking you whether you want another entry - or to make a VAT entry - or not to make another entry. If you click the VAT ENTRY button (or press V) C-Law will then ask you another question ...


In case you are not sure what to do here the dialogue box has an 'info' check box and you can click this to see a full explanation. If you leave it checked the info will appear next time without having to click the checkbox again.

It may assist to display the info screen here


The reason for the input tax button is probably clear now - it is to make sure that an appropriate input tax entry is made whereby the VAT is claimed on the payment. The reason for the middle button is that it is always necessary at some point to make a matching output tax entry - to match the input and the VAT entry that should appear on the clients bill for the disbursement. This can properly be left until the clients bill is entered in which case the middle button is not used. But to avoid the output being overlooked and to make sure the client ledger properly debits the client with the VAT due from the client you may prefer to make the output entry at the same time as the input entry. There is no real cash flow disadvantage to the firm as the input is being claimed anyway although if the disbursement is large and is not going to be billed to the client for a time then there may be a small significance. But in most cases there is no harm, and some benefit, in making the output entry straightaway. If this is desired then the middle button can be used.

The output VAT only button will not be appropriate in the entry situation described above. But it will be needed on occasions when the client ledger is being debited by OT transfer to a control nominal ledger where you pay an account periodically with VAT which includes several clients disbursements. In this instance you claim VAT input tax when you pay the whole account from the nominal ledger in the normal way. But when you make an OT entry to debit the individual client with what is due from the client you need to be able to enter the output tax to charge the client with this. This is when the Output VAT button will be needed.

Assume that you click the middle button. The next relevant question appears:-

You will normally just click the standard rate button. Then the input VAT entry will be prompted for you


Finally after you have accepted this entry the output tax entry will appear


As can be seen the effect on the two VAT entries is zero. The client still correctly owes the firm £86.25 ie: £75.00 plus VAT but this is made up in part of the output tax of £11.25. (This assuming you overlook the fact that the bill has not been sent and recorded yet. But now the bill can properly record the output tax as  payable by the client).

Bear in mind that if you do not want the option to enter VAT to appear when a payment entry on office bank is confirmed this prompt can be disabled from the option menu in the client ledger entry screen. Please also bear in mind that you will NOT get this VAT prompt at all if you have disabled the final user prompt altogether in the ledger options.

Client ledger and nominal ledger entry screens also contain wizards for setting up VAT entries

To generate a VAT report

The VAT report is generated from all VAT entries made since the last report up to the VAT cut off date for the current period.

If you are on Cash Mode (see above) then any entries in the V8 sheet are ignored (to ensure that VAT is not paid when bills are entered).

Note that the VAT report entries are ONLY written up when you do a daily clear. So you MUST do a daily clear after making VAT entries that you wish to see in the report.

Subject to this the VAT report will compile all entries since the last report was done up to the date you specify as your return date. Any entries after this date will not be included and will go into the next report. If you backdate an entry behind the date of a previous completed report, this last report will not of course be changed - the entry will go into your current report - otherwise you could lose entries by backdating.

Once you have compiled a report the software asks you on exit whether it is a FINAL report to H.M.Customs or an INTERIM one. 

IT IS VITAL TO SELECT YOUR RESPONSE CORRECTLY. If you click FINAL your report will be closed and stored and not available to be regenerated.

IMPORTANT:  If you are NOT sending in the VAT report that is on screen to HMRC then ALWAYS choose INTERIM.  

If the report is a final one and you are paying VAT on the basis of the report then you MUST  tell the software it is a FINAL report. The software will then "lock" the report and store it away and prevent you from making any more entries onto that report. It will be stored so you can access it for inspection but any more entries will then go into the next report period.

This makes sure that you have a report system that keeps track all the time of what you are doing and allows you to backdate entries while not letting them invalidate your report.

You go to the report screen by clicking on the VAT tool button.

You need to make quite sure that the settings are correct and that C-Law is looking for data in the correct period. The drop down box opposite "Final Date of Period should be telling you the final date for the report. If not then you need to change the settings

The Period menu item allows you to select the current period or a previous report. You cannot define the start of a period as the system will not allow you to do this to avoid entries being inadvertently omitted from the VAT return. All entries since the last report are always shown.

If the final date shown is in order Click on OK and the screen will show your VAT report. If you have not yet reached the end of the current period a warning will be issued.

Whilst compiling a report any entries you have made in the next period will be put into that period and you will only see entries made within the current VAT period for the report selected.

You can do one of two things now – you can print the VAT report if required. Or you can display the entries on screen or print them out.

To do this click on the FILE menu and select the appropriate choice.

When you exit from the report Windows you will be asked whether it is a final report or an interim report. Only click "Final" if it is in fact the report you are sending in to HMRC. If you select Final" the report will be stored and then the next period end date will be substituted. Once made final you cannot go back in to amend a report once finalised.

       Back to Index             Previous Page            Next Page