I apparently did not furnish enough detail in my earlier response, so let me elaborate now:
- The Guide I linked to previously covers both sales and purchase invoice situations, which is why I suggested reading it. It explains and provides an example for a purchase invoice like yours.
- The VAT calculation is independent of withholding tax. VAT is calculated on individual line items, based on the tax code selected for them.
- When I said that you had not applied withholding tax, I meant that you were not using the withholding tax features for sales invoices built into Manager. (What I did not say is that you never apply those features on purchase invoices, because you cannot.) I went on in that same paragraph to say that a withholding tax does not reduce the Total of a sales invoice, but reduces the Balance Due. I was referring to your supplier’s sales invoice, which you enter as a purchase invoice. I was assuming that your supplier would operate under the same principles used in Manager, which calculates withholding tax on the total amount, including VAT, of a sales invoice.
- The requirement for accounting for withholding tax on a purchase invoice is to match the supplier’s sales invoice. That sales invoice should have applied VAT to ordinary line items and determined a withholding amount based on the total. (In some jurisdictions, withholding is calculated differently, excluding VAT from the calculation. Regardless, the requirement is to match the amount of withholding specified by the supplier’s sales invoice.) For the purchase invoice you showed, the supplier’s sales invoice balance due should have been 12,335.80.
- Considering all of the above, the correct entry method in Manager is to (1) list the purchase quantities and unit prices of all line items on the purchase invoice, (2) apply the correct VAT tax code to every line item, and (3) enter a separate line item for withholding with negative amount—as you showed—to reduce the balance due to match the supplier’s sales invoice.
- The withholding line item has no tax code applied, because it is not a taxable supply or event. You did this correctly.
- The withholding line item should be allocated to a Withholding tax liability account, as described in the Guide.
- When you remit the withheld tax to the authority, post the payment to the Withholding tax liablity account, moving its balance back towards zero.
In conclusion, as long as you posted your withholding tax line item to a proper liability account, the purchase invoice you showed looks correct. Your concern that the withholding deduction not be taxed is unfounded, because you did apply any tax code to it.