Solution for UK VAT issue with EU acquisitions

[XaltPay]

Hi,

A load of posts related to the VAT topic related to EU companies buying goods/services from other EU companies, and as far as I can see, no direct solution in manager.io for this. But I believe I found a solution to resolve the issue, but manager.io IT team needs to implement a small change :

An example, to clarify

• Company (UK) buys goods/services from Company (FR) for 1.000 €
• Company (FR) will invoice to Company (UK) for 1.000 € (and doesn’t need to add VAT if company (UK) is VAT registered.

Accounting of company (FR) will simply mention : Sales account : 1.000 € and no VAT booking

Accounting of Company (UK) should state :

(Deb) cost : goods : 1.000
(Deb) Asset : VAT claim on EU acq. : 200
(Cre) Liability : VATdue on EU acquisitions : 200
(Cre) Suppliers : 1.000

In the Company UK VAT return form, the folllowing should be registered :

Box 02 : VAT due on EU acquisitions : 200
Box 04 : VAT claim on EU acquisitions : 200
Box 05 : VAT payable or reclaimable : 0 (= difference between box 02 and 04)

As you see, the VAT claimable and due on EU acquisitions cancel each other and result is 0

The issue with manager.io is that company UK will need to book this correctly but that no EU acquisition VAT code currently exists which does this automaticle for the claimable and due VAT on EU acquisitions.

Solution : Create a new tax code called “VAT EU acquisitions” as below, with multiple tax rates, and link each rate to the relevant VAT account in your chart of accounts (asset VAT claim and Liability VAT due

NOTE : this will NOT work correctly, because the system does NOT accept a negative tax rate, as I inputted in this example. I tried it, and the system doesn’t account for it correctly in the trial balance, nor in the VAT reports.

See further text below image.

So I changed the 2nd tax rate as a positive amount, just to see what would happen. Now all calculations of the 20% are done correctly, but as it’s a positive tax rate, the 2nd 20% is appears on the Liability account VAT EU due, as a Debit, instead of a credit, and appears as a double tax on the invoice :

and then in the trial balance, if a negative % would be allowed in tax rate, the balance would also show correctly :

Allowing a negative % as tax rate in tax codes would resolve in a simple way the EU acquisition VAT issue :
by simply specifying EU acquisition to any accounting cost code, the system would correctly book the purchase invoice

then for the VAT reports, it’s enough to consider negative tax rates as Tax collected instead of tax paid, and all comes into place.

I hope you don’t have a headache by now

possible to implement as such ? or perhaps create it as a template tax code, where user can adapt the VAT % as per country requirement.

Regards,

Patrick

[danielgalindezm]

That’s an interesting approach for sure. Let’s see what they say about it.

[Tut]

I confess you lost me with all your complexities. I’m certainly not an expert on UK or EU tax regulations, but why is one of these in-built tax codes not sufficient by itself?

If not, why not? There are many long-time users in the UK buying from EU countries who seem to report no problems.

[XaltPay]

Hi,

The problem resides in the fact that this not a VAT to pay issue, nor a VAT to claim issue, It’s buying goods from another EU country and receiving an invoice for the value of the goods, but having to add claimable VAT, and also Due VAT on the same purchase amount.
The end result is = Goods value + 20% VAT claim - 20% VAT due = goods value and no VAT to claim or pay.
if goods are bought in UK, you would pay 20% VAT to supplier and deduct this 20% value for your total VAT due.
with EU acquisitions and this system it avoids paying to VAT to the EU supplier and claiming it back from that countries VAT administration.

Indeed, a lot of people don’t report the issue, because they solve it through accounting, but then the VAT reports of manager.io are useless

an easy way to solve it accounting wise is like this, when you input the invoice :
I book the VAT claim and VAT due on EU acquisitions directly during invoice input via the account chart code, instead if having the program do the VAT automatically.

but why do it manually, if automatic would be easier ?

[Tut]

@XaltPay

a lot of people don’t report the issue, because they solve it through accounting

Let’s wait to hear from some other UK users and see what they actually do.

[Brucanna]

@XaltPay you seem to have created a problem when there isn’t one

For situations where you purchase within the EU and the VAT becomes zero due to the contra then use the “United Kingdom - VAT 0% (EU)” tax code.

A lot of people don’t report the issue because they use the correct tax code, not because they solve it through accounting.

[XaltPay]

Hi,

With all due respect, but “UK - VAT 0% EU” doesn’t produce correct info because :

it only books the EU invoice for the purchase value of the goods/services and doesn’t account or report any EU VAT impact, neither in the accounting itself, nor in the VAT tax reports.

UK accounting standards and HMRC Tax office clearly state that Buying goods from a business outside of the UK

Goods received from an EU country (non-UK):

This type of purchase is known as an acquisition or arrival
The supplier should not charge their country’s VAT.
You should account for reverse charge VAT in the UK
**VAT return: include VAT in box 2 and 4**
VAT return: include the net value in box 6, 7 and 9

So if I book a service that I paid to a FR company as 1.000 € VAT 0% EU, I only get :

Debit “purchases services” (cost) 1.000
Credit “Suppliers” (Liability 1.000

and nowhere in my accounts is there a mention of :

Debit VAT claim (asset) 200
Credit VAT due (Liability) 200

Meaning I can’t find in my accounting balance sheet the VAT amounts I need to put in box 02 and 04 of my UK VAT return

and also the manager.IO Tax reports don’t mention anything about this.

so the only solution is to input this manuallly as a + and a - on the VAT Claim and VAT due accounts during purcahse invoice input, or have a EU acquisition tax code which automatically puts 200 in the VAT claim account and also 200 in the VAT due account (which together cancel each other out)

Again, it’s not because the VAT result of a EU acquisition is 0, that nothing realted to VAT amount should not be booked, because then your accounting info is not correct (no mention of the 200 €vat anywhere, even if the total is 0)

The last screenshot of my first post show how I solve this currently, so that my account trail balance shows correct infor for my VAT return below ( below my soluiton and trail balance)

Booking the invoice :

the trial balance :

and now I can find all info needed for my VAT return in Tax Audit report (the others don’t show correct info)

Regards

[ries]

@Brucanna

For situations where you purchase within the EU and the VAT becomes zero due to the contra then use the “United Kingdom - VAT 0% (EU)” tax code.

In The Netherlands if selling company has a valid VAT number, the above mentioned is right.
Using “VAT 0% (EU)” is the way to go. No extra accounts needed.

[Tut]

@XaltPay, one thing you seem to be doing is posting taxes to accounts you created yourself. Manager’s in-built tax codes work by default through the Tax payable account. In other words, taxes collected and taxes paid both post there, thus offsetting when that is the regulatory intent. Did you know that, and have you taken that fact into account? See Create and use tax codes | Manager, and particularly the first Note in that Guide.

[Brucanna]

@XaltPay

“UK - VAT 0% EU” doesn’t produce correct info because . . . . doesn’t account or report any EU VAT impact, neither in the accounting itself, nor in the VAT tax reports.

Then in that case, perhaps the tax code is not functioning properly and this should be the correction, not the creation of a multi entry accounting workaround.

[XaltPay]

Hi, Indeed, so that accounting prodices the correct info in ledger accounts itself, the tax code UK-VAT 0% should create 2 automatic bookings in the accounts :

Debet to a specified “VAT claim EU acquisitions” in assets (for the amount of the calculated % on the purchase value)
and Credit for a specified “VAT due EU acquisitions” (for the same amount.

final VAT due becomes 0 on this transaction, but at least the info is there for the VAT form

[generalche]

I have this exact same issue with a Spanish entity issuing intra-EU invoices. Under the Spanish system, the intra-communitary VAT has to be added and then taken away for reporting just as you describe for the UK. At present we solve this via a separate accounting system, but it would be good to have the option within Manager itself.