Written by Giles Bennett
Setting up VAT for Magento is one of those things which, it seems, people generally avoid doing. A lot of people don't actually use Magento for book-keeping purposes, instead running all transactions through a separate point of sale or other accounting system, which means that they don't need to worry too much about tax within Magento itself.
Properly set up VAT rules in Magento, however, do bring one good benefit - if an overseas customer isn't liable to pay your country's tax, because the product is being exported directly to them, then if your tax rules are set up properly, they won't have to. Tax free shipping reduces the price that the customer sees, thus increasing the likelihood that they'll make the purchase.
For the vast majority of UK Magento stores which sell products to which VAT applies, the tax rules will be quite simple - 20% VAT will be chargeable on all sales to the UK and all EU countries. And that's precisely what the attached file represents.
Simply download it, then in your admin panel go to Sales -> Tax -> Import / Export Tax Rates, use the Choose File to select it, then click the Import Tax Rates button.
After that, you then need to create the relevant rule. Go to Sales -> Tax -> Manage Tax Rules and click on the Add New Tax Rule button. Name it VAT in the first box, then select Retail Customer in the second box, Taxable Goods in the third, and all the tax rates in the fourth and hit Save Rule. And that's it done...!
There are some pitfalls that can't be avoided. Without postcode filtering (which isn't possible for UK postcodes when it comes to tax), if customers in Jersey and Guernsey choose 'United Kingdom' as their destination country then they'll be charged VAT. But this should cover you for the vast majority of cases.