Does reverse charge work with cash basis accounting

I booked a purchase with a 19% reverse charge tax code. This means that in the Tax Summary report the 19% tax should be displayed in the Tax on Sales and the Tax on Purchases columns. I just noticed that the tax is accurately reported in an Accrual based report, but not in the Cash based report for the same period. Is this a bug?

How did you “book” the purchase, by payment form or purchase invoice? If by purchase invoice, have you paid off the purchase invoice? If not, the program will ignore your transaction until it is paid. That is one difference between accrual and cash basis accounting.

I booked the invoice and the payment in the same period. I understand that in cash accounting the payment counts, not the invoice. But if the payment were in the next period, than the net amount of the purchase should not show in the Tax Summary report. Also, when I run the same report with accrual base setting, the both tax amounts and the net and total amounts appear correctly. That doesn’t help me because I report on cash basis…

If you issue invoices, then it’s accrual basis all the way. The reason for this is that you raise the tax charge in the invoice so it can’t be recharged in later receipts.

In order for manager to accommodate cash basis taxes, they should be charged in the receipts.

The way I see it you have three options:

  1. Use sales receipts instead of invoices. You can keep track of your sales using sales orders and/or delivery notes.

  2. Change the process to have the invoice be booked without tax charge and then have the receipt undo the invoice and restate the tax to the correct amount. Not recommended, too complicated.

  3. And I prefer this one, adjust tax return for unsettled amounts. Idk if you can automate this using report transformations but manual adjustments shouldn’t be a problem; it would literally take 10 minutes to do.

@arjendn, @Ealfardan’s comments point out that there are more differences between accrual and cash basis accounting than when income or expense are recognized. There are also issues of when transactions should be recorded and how.

Another big difference that I did not address in my earlier post is the fact that with reverse charged VAT, no money changes hands. So, under cash basis accounting, the transaction is essentially ignored. Depending on local reporting requirements, this may not be allowed. So you may have to either switch to accrual basis accounting because of your reverse charged tax transactions, or you you may need to make adjustments to the built-in reports before filing tax information, as @Ealfardan suggested.

It’s not entirely correct that no money changes hand, there is the net amount that is paid. Surely it must be possible for the Tax Summary report to pretend that the VAT was paid and reclaimed in the same report. That’s the whole point of reverse charge VAT: not the supplier charges VAT to his customer but the customer “charges” VAT to himself.

Are you implying that all of the other tax codes do not report correct tax amounts (considering I have been issuing invoices for all my sales and filed my tax returns on cash based reports)??? Or is the problem just that in a reverse charge situation there is no actual cash payment for the VAT amount and therefore no registration of such amounts.

No money changes hands as a result of the purchase transaction. If you trace the exchange throughout Manager, you will see that no money is posted to any cash or bank account, the tax liability account balance does not change as a result of the transaction, etc. For a reverse charged tax transactions, the net liability is zero. The only issue is how the tax is reported.

You left out a critical aspect of reverse charged VAT. Not only does the customer charge VAT to himself, he effectively “pays” the VAT on behalf of the supplier. That’s why the net liability is zero.

All my comments have applied only to reverse charged VAT.

It’s all pretence, I guess… charge … pay… The question remains, is it possible for Manager to issue a Tax Summary report that shows the VAT one needs to report on a reverse charged purchase as if it was paid and as if it was deductible… As @Ealfardan says, it would only take 10 minutes, but 0 minutes is always better… and Manager is probably more reliable than manual calculations
As a side note: for the purpose of my tax filings I need to report the reverse charged VAT amounts separately from the normal VAT charges. For this reason it would be handy to have subtotals for all columns on the Tax Summary report depending on the Tax Code having Reverse Charge ticked or not.

In layman’s terms: If you want your reverse charge to show when paid don’t select any tax code when you receive that particular invoice. Instead, you should select a reverse charged tax code when you make the payments for that particular invoice, be it an advance or in arears, whether it’s full or partial.

Calling me a layman, are we now? :joy:

But perhaps I am… I’m still struggling: I have changed the invoice (luckily this quarter had only one!) to remove the Tax Code. As I could not change the payment to include the reverse charge Tax Code, I deleted the payment (after having copied its autoreference) and tried to reapply the payment. Unsuccessfully though: the Tax Code field on the payment is still gray… What am I missing?

You cannot apply a tax code to a payment posted to Accounts payable. The code must be applied to the purchase invoice. That is the taxable event.

The question was addressed to @Ealfardan. All the amounts recorded under the other Tax Codes show up in the Tax Summary report on the date the payment of the related invoice is recorded (so possibly in a next period). @Ealfardan’s “all the way” comment seemed to suggest that my process (using purchase invoices) is incompatible with cash base tax reporting… all the way…

Makes sense.

As I am not willing to change the way I process purchases (option 1 suggested by @Ealfardan), option 2 is too complicated (as I would have to delete the purchase invoices), I seem to be stuck with option 3.

The question remains: is it possible to automate this? If not, I have to copy paste (the other bug I discovered just now) into a spreadsheet, add the tax in 2 columns (output and input) and turn the purchase totals and column totals into sum formulas, and then use the new data for my tax return filing. For one invoice this is easy enough. But what if I have hundreds of invoices? Will this manual process not lead to rounding differences?

Thank you btw for your responsiveness. Really appreciate it.

Because that’s the only good response to this :grin:

But it’s good you’re not taking it the wrong way

That’s because there’s really no accounting entry for the the reverse charge, it’s just a cosmetic thing on top of your report, that’s why there’s nothing for manager to manipulate.

You don’t need to delete anything, the lines of the receipt should have 2 extra lines, 1 rebooking the purchase with the RC tax code and another to undo the rebooking but not the tax.

Another option still, is to never record RC invoice untill the payment is made.

But honestly, imo I don’t see a point in switching RC tax to cash basis. I never heard of that until now.

I filed my VAT return with the manual corrections on the Tax Summary report as described in my last post.

But my mind was blown when I checked my VAT return for the previous quarter. A very similar reverse charge acquisition (same Tax Code) was correctly reported in the Tax Summary (i.e. with the correct 19% VAT under both Tax on Sales and Tax on Purchases and the correct total under Total Purchases).

The only difference between the two quarters was me updating Manager… Might be a clue…

I understand

I chose cash accounting because I can and because I don’t have to pre-finance my government: VAT becomes payable only on receipt (and deductible only on payment). The reverse charge mechanism is not my choice: if I purchase something from another EU Member State (B2B) I am required to treat it like that.

I can reproduce the issue and it is a bug. Fixed in the latest version (21.1.9).

I doesn’t seem to be fixed for me… I updated to 21.1.9 and the two last Tax Summary reports still do not show the tax amount of the reverse charge Tax Code…

@arjendn you are right. I fixed that for reverse charge tax codes on sales invoices. Forgot about purchase invoices. The latest version (21.1.10) is fixing both.