These settings affect how the application files incomes and expenses under 'New' under 'Entries' in the sidebar. There are also settings for the VAT reporting interval (which will affect the VAT report) and the VAT number (which will be shown on your invoices). Additional settings for the VAT report are available in the form of VAT codes, specified in your chart of accounts.
For each VAT level (Normal, Reduced 1 and Reduced 2) you can specify which account to use for VAT on sales, VAT on purchases and for VAT when reverse charge applies. You also need to specify the VAT percentage at each level.
You then connect each sales account or expense account to one of these levels. This is done in the chart of accounts, in the 'VAT Level' column.