Tax from inventory write-offs not appearing in some reports

When I file my VAT returns, there are three main categories I need to detail:

  1. Declaration of output tax (sales)
  2. Change of use of goods (such as writing off inventory items as business expenses)
  3. Input tax claim (purchases, with imported goods being a sub category of this)

Several of the reports available under Tax Codes offer useful ways of getting what I need for categories 1 and 3, but it takes some effort to separate out the information that I need for category 2, usually involving some manual arithmetic once I’ve picked out the inventory write-offs from the sales invoices. I’m worried that my current methods are more prone to error on my part, as well as being more time-consuming.

So, I’m thinking of creating a new custom tax code with the same rate as the standard VAT, and using this for all the transactions that would fall under category 2 above. It would make it much quicker and easier for me find the information I need for my returns. The 100% “VAT on import” code I use makes it easy to see the details of my imports, and something like a “VAT 14.5% change of use of goods” code would similarly help me separate these transactions from regular sales.

So, my question is, is this a reasonable use of a custom tax code, and is there any reason I shouldn’t be doing this? I’m wondering if there could be implications beyond what I’m seeing in my reports.

I have discovered another problem. While trying to implement my plan above as a test, I noticed that VAT being applied through inventory write-offs is not being recorded as VAT payable:

Perhaps the program is functioning as designed and I’m not using the tax codes correctly, or perhaps our VAT requirements here (Zimbabwe) are different from most other jurisdictions. Either way, I would welcome some advice about how I can get a report similar to the above showing the results as labelled in orange, whether that’s through different use of tax codes, custom VAT worksheets, or changing the inventory write-offs to another transaction type (sales invoices or journal entries?).

Here is the edit screen for my “VAT 14.5% change of use of goods” custom tax code that I applied to all inventory write-offs:


I have edited the topic title to better reflect the focus of my problem as it has changed with this post.

Upon drilling down on the VAT payable account on the Summary page, I see that the tax from the inventory write-offs is in fact posting to that account. However, I still don’t understand why it’s not appearing in the Tax Summary report as shown in the above post. The same is happening in the Tax Transactions report, where there are figures in the column for Total Sales but not Tax on Sales for the inventory write-offs. Both of these reports would be much more useful to me if they showed these figures. Could this be a bug, or is there something I’m not understanding?

Go back to fundamentals. Write-offs are not taxable transactions.

OK. Why are tax codes selectable in inventory write-offs? When would one use them here?

Drilling down on my VAT payable account from the Summary page shows they seem to be posting to the account appropriately (though without anything in the description and tax columns):

And they seem to show up correctly in the Tax Reconciliation report:

If an inventory write-off is the wrong way of accounting for these transactions, what method would you suggest?

When doing my first VAT returns it did seem strange to me that I would have to pay VAT on items going from inventory on hand into business expense accounts, but my accountant confirmed that this is necessary:

  1. If I buy goods or services and allocate them directly to the appropriate expense account, I can claim the VAT as input VAT? [Accountant: yes]
  2. If I buy goods and enter them into inventory, and then use them later for shop use, I can claim the VAT as input VAT on the first purchase but need to pay output VAT (on cost price) when they move from inventory to the appropriate expense account? [Accountant: yes]
  3. So, if the above are both true, then when I buy something that I know I’ll eventually use in the shop, I shouldn’t enter it into the inventory at all, but should rather allocate it directly to the appropriate expense account? [Accountant: yes]

It’s VAT return time again, and I’m going through the same issues as described above. I’ve changed my workflow slightly as described below, but I’m hoping that someone might be able to suggest improvements or offer clarifications.

In summary:

When I file my VAT returns, I need to declare (1) the VAT from sales, (2) the VAT from change of use of goods (such as inventory being used by the business), and (3) the VAT from purchases.

I was using inventory write-offs to account for inventory used by the business, but the VAT on these was not showing up correctly in the various reports, though it was being allocated to the tax payable account.

I have changed the inventory write-offs to journal entries, and now the VAT from those is displayed correctly in the reports. I have also created a new custom tax code, “VAT 14.5% change of use of goods”, which separates these transactions on the reports and makes them very easy to pick out for my forms.

Now the Tax Summary report as shown below gives me all the information I need very easily:

However, my two minor gripes are:

  1. I still feel that inventory write-offs would be the more suitable transaction type to use, and I’m not sure why they don’t display the VAT in the reports.
  2. When I write off inventory for business use, I want to do it at cost price. Inventory write-offs calculated the costs automatically, but by using journal entries I have to look up the costs first, which adds a few extra steps.

At the outset, let me say I am considering moving this topic into the bugs category. But I would very much like to get @tony’s opinion first.

@GrahamvdR, I need to apologize to you. I was traveling and at the time and did not see your post #5, with its more complete explanation of why the write-off might be taxable. In actuality, it would not be the write-off that is being taxed. It would be use of the goods by your business. I interpreted your post #1 (item #2) as referring to writing off to a business expense account such as warehouse spoilage. But I understand now that the situation you are discussing covers converting inventory from potential future sales to current usage.

On that basis, the transaction could apparently be taxable under Zimbabwe’s laws on the output side, just as if you had sold the item to someone else, because there is no other end user to pay the final stage of VAT. If that is true, contrary to what I wrote in post #4, there could be a legitimate reason to select a tax code for the write-off. Again, I am sorry I never addressed that portion of your question because of my initial misunderstanding and missing your further explanation.

Yet that interpretation would be very unusual. The more customary approach under VAT schemes would be to consider the input tax you paid to your supplier as the final link in the taxation chain. In other words, to consider that instead of buying for inventory, with the expectation of onward selling to someone else, you purchased for your own end use. In VAT vernacular, you have added no additional value. So there is no additional VAT to collect or remit. I believe you should discuss this again with your accountant. The basic circumstances are simple: you paid VAT when you purchased the item, and you are the end user. Why should any further tax be imposed?

Nevertheless, if your conversion to end-use is, indeed, taxable, here is what I believe is or should be happening:

  • A write-off would be the preferred method in Manager for recording what you are doing.
  • Output VAT on write-offs is correctly being applied to the tax liability account, based on the current average cost of the inventory item.
  • The resulting tax on sales should show up on the Tax Audit, Tax Summary, Tax Reconciliation, and Tax Transactions reports.
  • A drill-down on the tax liability account should show the appropriate tax code as applying to the write-off transaction, along with the resulting credit to the tax liability account.
  • The cost of the inventory item written off should be added to the appropriate expense account, but not the tax. This would be similar to the cost of items sold to customers being added to the Inventory - cost account, but not the tax assessed to the customer.
  • Inventory on hand should be reduced by the average cost (without tax) of the inventory item written off. The transaction should show as having had the appropriate tax code applied. This part is now happening correctly.

As to what I believe is not happening correctly, assuming the write-off is really taxable:

  • The tax on the imputed sale from the write-off is not being picked correctly by the Tax Audit report. Instead, the transaction shows up in the No tax column.
  • A drill-down on the tax liability account shows no tax code as applying, although the credit for the tax is listed. This seems to correspond to the no-tax situation in the previous bullet.
  • Tax from the write-off does not show up at all on the Tax Summary. However, the write-off transaction is included in the sales figure.
  • Tax from the write-off does not show up on the Tax Transactions report. The equivalent sale is, however, also included on this report.
  • Tax from the write-off is being included, along with average cost of the inventory written off, in the expense account to which the write-off is posted.

Turning to your use of journal entries, I see no reason you cannot continue doing that. After all, write-ons must currently be entered with journal entries. There is no conceptual difference between a write-off and a journal entry. So for now, do what gives the correct result.

The thing that is puzzling me in all this is balancing the debits and credits in the transaction if the conversion is truly taxable. For ease of illustration, consider an inventory item with an average cost of 100 and a 10% tax rate. A normal, non-taxable write-off would be equivalent to:

Inventory on hand 100 Cr
Inventory write-offs 100 Dr

Make the transaction taxable, and you have:

Inventory on hand 100 Cr
Tax liability 10 Cr
Inventory write-offs 100 Dr

Where do you allocate the remaining 10 debit? Right now, Manager is putting it into the Inventory write-offs account:

Inventory on hand 100 Cr
Tax liability 10 Cr
Inventory write-offs 110 Dr

So the books balance, but you are not showing the tax in several of the reports. And the allocation of both cost and tax to Inventory write-offs seems wrong, because you already claimed the input VAT when you purchased the item. So the tax is not a current expense. It was already debited to the tax liability account to offset collected VAT when the item was purchased.

All this highlights the problems with considering the conversion a taxable event.

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Thank you @Tut for getting back to me and for your detailed reading of the topic and response.

Yes, I agree with you on the above. However, I have confirmed it with my accountant, and also present as evidence shots of the VAT return form:

…and explanatory notes for the completion of the VAT return form (see row V21):

Both of these are available to download in their entirety from our tax authority at (Note that as of 1 January 2020 the VAT rate was revised to 14.5% from the 15% shown above.)

I agree with your interpretations of what is happening, and the problems. However, I’m having a hard time fully understanding the implications of your debit and credit example at the end of your post. I need to spend a bit more time working it out in my mind, and perhaps talking to my accountant some more.

If we look at the explanatory table above, I see that instead of listing the tax rate for change of use of goods as 15% it says “15/115”. Do you think maybe that implies that the total cost of the item plus the tax should be allocated to the Inventory write-offs account (or whatever expense account I allocate it against)? That doesn’t seem to be happening. See my edit screen for a journal entry write-off:

Here the cost before tax is $62.41, which matches what is shown in the Summary page:

If I apply the tax to the last line in the journal entry, the amount shown against “Consumables” in the Summary page decreases by the tax amount.

So am I! That is why I want @tony’s thoughts.

That is just because the description of V21 calls for the tax-inclusive price. You can’t use 15% to derive other relevant figures. The same principles apply as when you enter a tax-inclusive transaction in Manager.

That is what a write-off currently does. And the definition of V21 seems to support that.

Remember that all journal entries must be tax-inclusive. This is explained in the Guide on journal entries.

Ah, OK. Thanks. I think I understand. Hopefully @tony will be able to offer some further clarification where we’re still not sure.

V 21 is for goods applied to your use. Inventory write offs cannot be used for goods applied for private use.

Inventory write offs account for goods that are obsolete, damaged or missing with the VAT claimed when the goods were purchased. Writing off the inventory should not affect the VAT claimed when the goods were purchased.

If you take goods for private use, it is correct that VAT claimed when the items were purchased should be reversed. You achieve this by journal entry that debits your capital account with the VAT inclusive value of the inventory taken for private use and crediting inventory on hand, selecting the custom tax code.

Thanks @tony. However, in this case what I’m particularly interested in is the use of inventory within the business and allocated to a business expense account, not for private use.

If the inventory is used within the business, I would expect that VAT would not be reversed but you should seek professional advice from a local tax agent. My untrained interpretation/guess of V21 is that it would apply to goods applied to private use. If the goods are used within the business instead of for resale then you would debit an expense account instead of your capital account. In case the goods are used as components of a depreciating asset then you would debit the depreciating asset account.

You only need to ascertain the correct treatment of VAT applied to the credit side of the journal entry. I would have expected that VAT would be applied to the goods if they are taken for private use but not if they are used or written off within the business.

11.Change of use of goods and/or services. (Goods applied to own use)Apply tax fractionV21

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Housekeeping details first: I read the wrong line of @GrahamvdR’s chart when I originally referred to V20. After seeing @tony’s correct reference, I edited my earlier post to V21.

@tony’s distinction between business use and private use makes sense to me. Conversion to business use would be recorded with a write-off and involve no tax code. Conversion to private use is effectively a sale by the business to the private user, and would be recorded with a journal entry and apply the relevant tax code.

@GrahamvdR, you should discuss this important difference with your local accountant. Considering the answers you have already obtained from your accountant, I would also pose the question directly to the tax authority to get their interpretation.

This also begs the question of why tax codes are allowed on write-offs at all, but that’s another issue.


@GrahamvdR this was a bug. What you’ve done is correct. Manager allows to use tax code on inventory write-offs becase in some circumstances, write-off does affect your tax liability (or credit). E.g. when the item is written-off for private use.

Tax Summary report wasn’t able to pick up these taxable inventory write-offs. The latest version (20.2.83) is fixing the issue.

Just to clarify, inventory write-off is not just for spoiled/damaged goods, free samples or internal consumption. It should be used for private use as well.

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So, @GrahamvdR, let me try to summarize an interesting exchange of observations, opinions, and corrective actions:

  • Your original suspicion, corroborated by my observations in post #7, about a potential bug was correct.
  • The general guidance about write-offs being for non-revenue reductions of inventory, as described in the Guide, was also correct.
  • One element of the Guide, mentioning that the Tax field of the write-off form was applicable if acquisition of the item was taxable is incomplete. It should more correctly say that a tax code should be selected if the acquisition was a taxable event and the disposition is, too. I will initiate a modification to that Guide.
  • @tony’s observations about the difference between conversion of inventory for business use versus private use are still relevant. In your case, resolution will hinge on what Zimbabwe’s tax authority meant by “own use.” Did they mean use by the business or private use by, for example, the owner. This is still worth checking.
  • The question of why the Tax field is there if it has no effect on reports is resolved by the bug fix. It should be there, but it should have the effect you correctly thought it should. Now it will.
  • Going forward, you can use write-offs when you convert inventory for any kind of non-revenue usage. You should definitely apply a tax code when that use is private. Whether you should apply one when the use is within the business depends on your tax authority’s interpretation.
  • Your use of a separate tax code for conversions is not necessary from an accounting perspective. But it may be convenient to segregate transactions for reporting purposes.
  • Finally, when the write-off is a taxable event, Manager is still posting the cost of the inventory item plus the tax to the Inventory write-offs account. That’s the same as before. Although it seemed wrong to me when tax was not being picked up by the reports, it was actually correct. The explanation is that when VAT was paid to the supplier upon original purchase of the inventory, tax was debited to the tax liability account (reducing it). Now that the item is not going to be sold, you can no longer claim that input VAT, so the debit must be transferred, along with the value of the item from Inventory on hand, to the Inventory write-offs account (whatever you call it). This has a further implication: if your tax authority insists that conversion of inventory to internal business use is taxable, your ultimate payment of the final link in the VAT chain will be offset by an identical expense in your Inventory write-offs account. All will be well with the world. In the end, it won’t matter financially what your tax authority says about taxability of the event. You will come out the same on the bottom line.
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Sorry @Tut and @GrahamvdR, I did not know the inventory write off function was so flexible that avoids the need to use journal entries for every type of write off. Now that @lubos has fixed the bug, it is now a matter of allocating the correct VAT code to the write off as indicated by @Tut.

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Thank you @Tut for digging so deeply into this and offering constructive feedback and useful summaries to help us all keep track of the multiple issues at play here.

Thank you @tony for your input too.

Thank you @lubos for the bug fix and the clarification of intended usage.

I will see if I can get a second opinion about whether writing off inventory for business use is taxable for us. I agree with your various observations above that this seems to be an unconventional requirement, but I do trust my accountant and the advice she has already given me. I am glad that Manager has the flexibility to allow me to handle these write-offs either way.

Thanks, understood. I created the new tax code purely for the purpose of separating those transactions from regular sales in the reports.