DESKTOP EDITION CLOUD EDITION SERVER EDITION GUIDES FORUM

VAT - Reverse Charge


#1

Can someone please guide me on how to record a reverse charge in Manager. I have searched for the same on the forum, and although the topic has been started there has not been any actual explanation or final closure on this.

I am filing my returns on the VAT portal and the import and customs VAT is already pre-populated based on what my suppliers have recorded with the authorities. This was not on the invoice received and hence not paid out. So all the VAT reports do not have this amount accounted for.

How do I now include this amount in Manager? and reconcile the total amount being paid out.


#2

If I understand you correctly, you are saying that one of your suppliers did not put the VAT on his invoice and you did not record the VAT.

If this is the case, then can you not just edit the transaction and put in the correct amount of VAT? This will adjust your P&L and VAT accounts accordingly.

If you cannot do this because your year end does not coincide with the VAT year end, then you can enter a correction via a debit note to cancel the wrong invoice and a revised purchase invoice to record the VAT correctly


#3

No. In case of imports, the supplier records the transaction with Customs and issues the invoice without VAT. As a client we pay what is invoiced.

However, this transaction is then calculated by the govt authority and is added as an output tax on the FTA website when we are filing our returns.

I have been told my an accountant that this needs to be reverse charged, which will then enable the amount to be added to the input tax amount auto calculated by manager which would lead to the reports reconciling with the amount to be paid.


#5

What country are you in? There are a number of posts on the forum about Reverse Charge. One of them may help


#6

UAE.

Since the moderators have not said anything, I’m going to recheck the forums again and try and search this out to see if I missed anything.


#7

|Search “Reverse Charge” in the search box top right and you will see many message son this subject including some with UAE.

The moderators do not necessarily have expertise in Reverse Charge, particularly if they are in a country where the practise isn’t common


#8

I will prepare an example, but it takes time, and I have other commitments.


#9

Thanks Tut, much appreciated. :slight_smile:


#10

I am withdrawing my promise of an example. Handling the tax is simple with a 100% custom tax code on an additional purchase invoice line item, entering the tax amount as a negative number. This shows up correctly in the Tax Summary, but since the line item is not a taxable transaction, it does not appear on the Tax Transactions report.

More importantly, there is no source for the information necessary for tax filing on the UAE web site. Because the reverse charge VAT is handled as a unit price with the foregoing method, you have no source for sales volume subject to reverse charge VAT.

Most of the prior discussion of this subject on the forum centered around the Netherlands. And eventually, a number of dedicated, in-built tax codes were added, along with a country-specific worksheet. @lubos may decide he wants to do something like that for UAE, too.


#11

You need to enter the VAT via a Purchase Invoice as though the govt authority had sent you one but you also need to add an extra line to that Purchase Invoice.

Let say the value of the VAT is 100 being 10%, so the imported item was worth 1000.
On the first Purchase Invoice Account line you would enter the item as per a normal purchase.
On the second Account line re-enter the item but with a matching negative number and NO tax.

You can pick any account but use the same one for both lines.

If you go to this topic Journal entry for vat invoice you will see an example.


#12

Thank You Brucanna.

I did experiment what you said and realized I made a big mistake in the question earlier. I mentioned that the pre populated tax is calculated as an input tax when in actual fact it is a output tax.

I also followed your explanation to a user in Sept (Topic : Importing of goods) and I used your logic of marking the purchase as a zero rated tax as we not paying the supplier.

I am not sure how to get the tax under the collected header in my tax summary which will then get my Tax liability in line with what is the payout mentioned on the FTA website.


#13

Thanks Tut.


#14

I’m going to add support for reverse charge scheme when creating custom tax codes.

Reverse charge tax code will have no impact on balances of your accounts but will inflate figures on Tax Summary report to match what tax authority would expect.


#15

OK, not sure if my implementation is good but let’s see if it’s getting us anywhere closer. This applies to the latest version (18.5.67)

When you create new custom tax code and select 0% tax rate, there will be a checkbox “Reverse Charged” which you can check and then enter the rate.

So for example, if you are creating VAT 5% tax code which is to be reverse charged, then you’d create it like this:

It’s not totally intuitive but that’s something I will improve on in upcoming versions.

The idea of reverse charged tax code is that it won’t have any impact on your accounts. It will affect tax summary though.

Let’s say we made a purchase of 1,000 and applied this tax code to it. Here is how the transaction will show in Tax Summary report:

Net Purchases will be 1,000 however reverse charged rate will inflate both Tax Collected and Tax Paid by the reverse charge rate. There will be no change to Tax liability but if tax authority knows your Tax Paid figure inclusive of reverse charged VAT, then Manager should give you the same figure in Tax Summary.


#16

This works well, as far as it goes, @lubos. Transactions are simple. But reports are potentially confusing. And the entire goal with this change was to enable reports that support necessary tax filings.

First, you are inflating the Tax Collected and Tax Paid amounts on the Tax Summary report, but not on the Tax Transactions report. A similar transaction shows up there like this:

The implication is that no tax was charged/collected or assessed/paid. As it happens, that is actually true. An incoming sales invoice (converted to a purchase invoice) in a reverse charge VAT situation will not include any tax. Yet the Tax Summary will show both collection and payment of tax. And the Total Purchases column on the Tax Summary will reflect an amount larger than what the supplier billed.

At the same time, the Tax Transactions report shows no tax component at all and a lower Total Purchases amount matching what the invoice really said and what would be paid.

Perhaps the solution is to change the calculation on the Tax Summary report so Total Purchases includes the sum of Tax Collected, Net Purchases, and Tax Paid. That way, the total will match what has been invoiced. In normal situations, there will be nothing in the Tax Collected column, so lines for ordinary tax codes will be the same as they are now. The result would be agreement of totals between Tax Summary and Tax Transactions.

If you adopt the suggestion above, I think the Tax Transactions report could be left as is. The Total Purchases column would match the Tax Summary and the purchase invoices. The Tax Collected and Tax Paid columns would be zero, but that would reflect the actual transaction, where tax did not appear on the invoice. This is an improvement over previous workaround solutions using 100% custom tax codes, because transactions using them did not show up at all on Tax Transactions.

Second, is the terminology misleading? The column labels imply that tax charged to customers has been collected, possibly before it has. Likewise tax may have been billed to the business by a supplier, but not actually paid. The terminology isn’t too confusing for normal tax situations. Anyone using accrual basis accounting will probably realize what they mean.

But when you get to a reverse charge situation, confusion is more likely. No tax has been invoiced, collected, or paid, and never will be. The amounts in both columns on the Tax Summary are imputed, or virtual, taxes contributing to calculation of overall, effective amounts. One report (Tax Summary) says they were collected and paid, while the other (Tax Transactions) doesn’t mention them. And the total purchase amounts conflict. My suggestion above resolves the purchase amount conundrum. And there is a valid reason for differences in the Tax Collected and Tax Paid amounts on the different reports, although the reason will probably elude some users.

That all points out possible confusion over what “collected” and “paid” mean in a real-world environment where there are both ordinary tax transactions and reverse charge ones. Not only do they mean slightly different things under accrual versus cash accounting, they mean totally different things in reverse charge situations. I don’t have a suggestion to improve that. And it may not be necessary to change anything if other confusions are cleared up. I am curious what others think.

Third, right now, reverse charge tax codes can be applied to sales invoices. Yet they have no effect on the invoice besides showing up. And they affect no accounts and show on no reports. There is no situation I know of where you would apply a reverse charge VAT on a sales invoice, so why allow such a tax code to be applied to sales invoices?


#17
  1. The consistency across reports can be easily fixed. Right now, I made it work on Tax Summary report only just to see if we are heading the right direction.
  2. I agree. Terminology should be updated. Perhaps Tax paid should be Tax credit and Tax collected should be Tax liability and Tax liability should be Net tax ? This way we avoid using terms “Paid” and “Collected”.
  3. That’s correct. Tax code like that would be irrelevant on sales invoice. It could be hidden from autocomplete list if it doesn’t apply.

I think the most important issue right now is to agree on terminology.


#19
  1. If you agree consistency should be addressed, does that mean you are agreeing the Total purchases column on the Tax Summary should be the net of the three columns I mentioned? That would make that column match purchase invoices and payments, as well as matching the Tax Transactions report.
  2. I agree terminology is the big issue. But Tax liability and Tax credit don’t seem quite right. Liability could be confusing for ordinary transactions, where the customer owes tax to the business and the business also owes to the authority. Whose liability is being referred to? Credit could also be puzzling. People tend to think that if they have a credit, someone is owing them money. That would not be the case. For a normal tax transaction, the business would owe the supplier the amount in that column. For a reverse charge transaction, no one owes anyone, but the authority would apply the amount to the overall tax account. In summary, I think we need terms that seem applicable in either normal or reverse transactions.
  3. No further comment.

#20

OK, why try so hard for fancy labels? How about switching to the simplest, most obvious ones:

  • Tax Collected => Tax on Sales
  • Tax Paid => Tax on Purchases
  • Tax Liability => Net Tax

These same labels would be used on both Tax Summary and Tax Transactions. They work for accrual or cash accounting, pending or closed invoices, and normal or reverse charged VAT. They are also less subject to misinterpretation upon translation to other languages. Plus, there are no ambiguities about whose liability, who has paid (or will), who collected, etc.

Other labels should also mean the same things on the two reports:

  • Net Sales and Net Purchases would refer to amounts on invoices, receipts, or payments without tax
  • Total Sales and Total Purchases would refer to amounts with net tax. For ordinary sales, this would mean what it has in the past: net sales plus tax on sales. For ordinary purchases, it would mean net purchases plus tax on purchases. For reverse charged purchases, it would mean net purchases plus tax on purchases minus tax on sales. (Of course, there would be no implementation difference between ordinary and reverse charged purchases, because on ordinary purchases tax on sales is zero.)

#21

Here is a suggested alternative:

  1. Make Reverse charged an option in the Tax rate dropdown list.
  2. If selected, the percentage window appears.

This prevents possible confusion by labeling a rate as zero and then having to enter a number.


#22

Dear @lubos . Thanks for the feature that I needed so much. In Italy this kind of witholding on vat is called split-payment.

However the sale invoice is created by manager is wrong under a legal point of view. You need to calculate and applicate the vat rate as a normal invoice, do the total that includes vat and after that deduct the vat as a normal witholding tax deduction.

Please find an example (in italian vat is iva)