What is this screenshot? Sales invoice or purchase invoice? It looks like sales invoice.
Sales invoice
Reverse charged VAT only applies to purchases. If I understand what youâve said about split-payment taxation, it is correctly handled as withholding tax in Manager. But to be clearer, can you explain the process? Who actually pays the tax, who temporarily holds the tax prior to tax filings, who pays the tax to the authority, and how is accounting for all this made to the authority?
Why ?
A business has an internal supplier who charges 1000 + 5%, so the business pays 1050 to the supplier, which pays 50 to the tax authority.
A business has an importer supplier who charges you 1000 and the tax authority charges you 50. The business pays the supplier 1000 and the tax authority 50.
- To contra the 50 off in the Tax Summary report as illustrated implies that the tax authority is forgoing the collection of the 50 and 2) the 50 has absolutely nothing to do with sales or tax collected as the business has never charged or collected it. The imported item could be sitting in the warehouse âunsoldâ.
AS stated in the original post âHow do I now include this amount in Manager and reconcile the total amount being paid out.â They arenât trying to avoid the 50 being an accounting transaction, but are trying to include the tax authority 50 which they havenât been directly invoiced for, except for the notification via the VAT portal.
The use of the term Reverse Charge, seems to have confused the issue as their is no reverse charge - there is just a single charge 1050 being proportioned into two separate payments.
The businessâs quarterly return would be the nett between the tax collected/paid plus the tax charged on imports but not yet paid.
My assumption is that businesses using VAT reverse charge would be eligible for full VAT refund. Iâd say this would be almost always the case. Thatâs why I said reverse charge VAT wonât have any impact on accounts.
However, there are exceptions. If you use VAT reverse charge on purchase where some portion is for private use, then you will have to actually pay portion of the VAT to tax authority. Another exception would be if you are under some simplified scheme like flat rate in UK where you pay VAT on your turnover and canât get any VAT refund on purchases. I donât have yet solution for these two scenarios.
I actually use withholding tax but I have to modify the template in order to show the correct description in the correct place. I can actually use it since I donât have the âstandardâ kind of withholding tax in my invoices. If so I would need two different lines in the sale invoice after the total:
- less withholding tax
- less vat split-payment
which Manager cannot handle. Thatâs why I tried to use it under the tax module. I think it would be a more correct use in that way.
The process is:
- Company A emit the sale invoice to Company B (for example 1000 + 10% VAT = 1100; less -100 VAT split payment = Total to be paid 1000)
- Company B pays 1000 to Company A and 100 of VAT goes inside its VAT declaration of the month ad a debit
- After Company B closes its VAT position at the end of the month I receive a written confirmation by the tax authority that the position is closes
The invoice should be emitted the way I sent you. I think a little implementation of the withholding that we have now in the tax module (ie an implementation in the template) will create the correct result.
Hi Brucanna,
I think @lubos is on the right path with regards to the initial work on generating and booking the transactions. I have had a look at how other accounting softwares such as Zoho Books and Tally are treating such transactions and it is more or less in the manner that Lubos has created to recording the reverse charge amounts. That being said they reconstruct the entire layout in their reports to replicate the returns sheet on the FTA portal. So I am just basing it on the numbers being populated via the tax summary to match the numbers on portal.
But of-course, this is my two cents on the topic I raised cause I am still double checking with an accountant if this will suffice for now.
I will continue to read and see what you folks implement on this and hopefully someone with more knowledge than me from my region will provide constructive feedback.
Yes, but the âunpaidâ authority assessed VAT isnât Tax collected by the business - in effect you have:
Tax collected + âunpaidâ assessed VAT - Tax paid, where the reverse charge is a contra between the âunpaidâ and the Tax Paid and would only have limited application when the supplier and the tax authority are in the same currency and within the same VAT return period.
Furthermore it wouldnât be applicable for:
1 - Suppliers who have invoiced in a foreign currency as the exchange rate used between the payment and the tax assessment could differ.
2 - Suppliers invoicing (December) and the tax assessment (January) falling within different VAT return periods causing portal timing reconciliation issues.
3 - Where Freight Forwarders charge the VAT on behalf of the tax authority.
So it needs to be a country specific solution, as Manager does for other countries, rather then a generic one with restricted application.
But this is not how it works. The tax authority does not directly charge you anything. You assess yourself the tax the foreign supplier would have charged if they had been domestic. At the same moment, you report the tax you would have paid to a domestic supplier. The two cancel, and nobody pays the authority anything. But you account to the authority for both the imputed output VAT and offsetting input VAT.
No. The intent is to show that the imputed 50 from the foreign supplier side of the transaction is offset by what you are entitled to claim as the purchaser. If the supplier were domestic, the authority would receive the 50 from the supplier, but pay it directly back to you as the purchaser. So the authority gets nothing, which is correct. Reverse charged VAT essentially means no net VAT is due because the taxable goods or service come from outside the territory.
This observation, I think, reinforces how confusing current terminology is. I tried to address that with my earlier suggestion for new labels on tax reports.
And that is what the Tax Summary now does.
I agree, but everywhere Iâve found that uses the scheme uses this terminology. The Guide just published on the initial version of this feature addresses the reversal of roles between seller and buyer that leads to the phrase.
This is another example of how current terminology leads to misinterpretation.
With reverse charged VAT, the supplierâs currency is irrelevant, because the supplier does not calculate or report the tax, the domestic business does, in the domestic currency. And, by definition of how reverse charged VAT works, all aspects of the transaction are reported simultaneously. So everything always happens within the same reporting period. There is no more difficulty with later tax filing deadlines than with any other form of tax. So your first two numbered points, where you suggested inapplicability, are not relevant.
Your third numbered point about freight forwarders is also not relevant, because a freight forwarder will be domestic if they are charing VAT on behalf of the authority. Remember, reverse charged VAT applies when no one assesses VAT on the supplier end of a transaction. A forwarder would do so only if they are registered with the authority.
Not that I can see. Properly interpreted tax reports will provide all information I can envision an authority requesting: imputed tax on sales, offsetting (though unpaid) tax on purchases, sales and purchase amount subject to the tax, theoretical totals of tax-inclusive sales and purchases if tax had been charged normally, etc.
It seems that can be handled with a journal entry to transfer appropriate tax amounts (plus or minus) to Tax payable. Then a regular bank or cash transaction can record the payment or receipt, whichever arises.
I donât think this is a problem, either. Under flat rate schemes, no tax code is applied on purchases, because input tax cannot be claimed to offset output tax. Any tax is included in the price. Instead of claiming input tax, less output tax is remitted to the authority than collected and the balance retained as additional profit. Presumably, the flat rate schedules for various sized businesses in different market sectors already take into account assumed proportions of turnover that would be taxed under a reverse charge approach. That would be one factor affecting differing rates. Qualified accounting professional from countries that employ flat rate schemes may have additional guidance to share.
Further, a reverse charged VAT purchase will include no tax (by definition). So the tax-inclusive price mentioned above will actually be devoid of tax. Since nothing is paid out, there is nothing to offset. And no special treatment is needed.
Bottom line: I donât think you need solutions for your two exception scenarios.
If I interpret your additional information, @Davide, you are now agreeing that Italian split-VAT is a different situation from reverse charged VAT. Is that correct?
Assuming it is, it seems your need could be fulfilled by an ability to apply more than one âinvoice modificationâ feature at a time on an invoice. Already, we can apply rounding, offer early-payment discounts, apply tax codes, and withhold taxes at the source simultaneously. If we can combine these, why not be able to do things more than once? Why not VAT on line items and special surcharges on an entire invoice, for example? Or VAT and split-VAT withholding? I think thatâs what you are suggesting.
Yes, split-payment is different from reverse charge.
And yes, split-payment can be achieved applying witholding tax flag once or twice in case you have to apply the standard witholding tax to the invoice. Or using the actual new flag in taxes with an extra trick by @lubos on the output. The first solution would be more flexible; the second can be done, I think, with few steps.
Yes it does, it just that you have taken that quote out of the context in which it was written as a response and nit picked it, so for your benefit I will embellish it: âA business has an importer supplier who charges you 1000 and the tax authority charges you 50. The business pays the supplier 1000 and the tax authority 50. The business on doing their tax return would then be refunded the 50â.
If the VAT is actually paid / refunded or a contra is irrelevant as to the understanding of the full VAT process, furthermore import VAT is not always a zero sum, otherwise, why would tax authorities concern themselves with it.
This seems to contradict the reality as put in the opening post: âthe import and customs VAT is already pre-populated based on what my suppliers have recorded with the authorities.â
I agree with this if you are looking at the full picture. What I went on to say, if you will re-read my response you quoted, was just a clarification that the authority doesnât actually charge you anything and nothing is paid. Once again, I think this is confusion caused by current terminology.
I believe they do this partly because they want a complete accounting of international trade volume and know they have little chance of obtaining it from businesses outside their jurisdiction. So they shift the reporting burden to the buyer, who is inside their jurisdiction. That also prevents a domestic buyer from claiming input VAT and getting a refund for which the authority did not receive the output VAT from the supplier.
I interpreted the opening post as information telling us that what was reported by suppliers is pre-populated, but not that this specific supplier had reported information. Therefore, the amounts involved in a reverse charged VAT transaction are not contained in the pre-populated report. My interpretation was reinforced by the subsequent statement, âSo all the VAT reports do not have this amount accounted for.â @Justin will hopefully confirm whether my interpretation was correct.
The amount that is prepopulated is as below
Customs gets this data from the supplier / clearing agents. The figure on the left is a combination of the purchase value in local currency plus duty and is consolidation of all import purchases.
The purchase value is based on the invoice submitted to customs by the supplier in case of them being a free zone entity or submitted by the clearing agent (invoice) in case its an overseas import. The duty is then calculated and paid by the clearing agent or supplier. We settle this total amount to the respective person by raising an invoice in manager. This does not show up in our purchases in our tax report cause no VAT was charged or recorded.
The figure on the right is the 5% VAT amount to be paid out to the Tax Authority which is auto calculated based on the figure on the left submitted to them by Customs.
We then have an option to claim this amount as input tax in a separate line item 10 on our returns sheet as shown in the pic below.
With lubosâ putting up the enhancement, I am now able to have a separate line item that shows these purchases and also show the prepopulated amount, albeit it saying tax collected. I can use this as the amount that is to be entered in line #10 on the pic above, to offset the amount prepopulated.
This was not there earlier and my purchase account entries did not support the prepopulated amount in the FTA system, as VAT was not applied to the invoices and there was no way to support this amount that could be claimed back as an input tax.
which is why I raised the help query.
Thank you, @Justin. I think you have confirmed my understanding. To be completely clear, let me summarize what I am thinking:
- The right-hand box on Line #6 is auto-calculated by the tax authority based on imported goods value. But for reverse charged VAT transactions, it was not reported to the authority by the supplier or anyone else, because nothing was charged or paid.
- The two amounts on Line#10 are input entirely by you for reverse charged transactions. These are providing data the authority would otherwise not have.
- Your problem was that you had no corresponding figures in Manager for these three boxes, but now you do.
- As you mentioned, improved terminology would make things more obvious. But the program change meets your need for supporting financial information.
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This part is reported to the authority by customs based on what the supplier or clearing agent inputs to clear the goods. This is the prepopulated amount I initially was referring to. The right hand box is auto calculated like you said, but is based on the amount on the left hand box.
Good Afternoon.
Revisiting the subject topic, can you please let me know if manager supports exchange rate differences and additional customs charges.
Let me explain, our current customs declaration form is based on the invoice and BL that we submit to our forwarder. The invoice amount is what has been paid out as per the exchange rate of the bank which reflects in the bank statement which also matches the inputs in manager.
The customs declaration amount however that is sent to the Tax authority is different, this is due to the following reasons.
1.The exchange rate applicable to convert the invoice amount to the local currency is different and hence this is not the amount that reflects in our purchases.
2. A certain insurance amount is added to the invoice in our shipment as a standard practice, and on this total amount (customs invoice value plus insurance) the customs duty is calculated. But this additional insurance amount is never paid to any entity or person and hence is not recorded in manager.
VAT is then calculated on the Customs purchase value (local currency) and on the Duty which now includes the insurance amount.
Currently manager does not reflect this because, it is based on the payouts made with the bank exchange rate and the insurance value is not recorded anywhere and is neither paid out. The reverse charge currently created by ( @lubos ) takes values from the invoice that has the reverse charge tagged to it which holds an amount that is pertinent to the bank statement.
Other accounting softwares such as tally, tackle this by giving the user an additional screen to input the taxable purchase value as per customs and then calculates and populates the fields which matches the tax authority prepopulated figures.
Is there a workaround or guide to record such activity in manager?
This is not clear. Who adds the insurance premium and when? How can you say the amount is never paid to any entity? If not, why is it added?
@Tut the process by UAE Customs is to charge duty on a CIF (cost, insurance and freight) basis.
When shipments are imported on CNF (cost and freight) basis, the customs system automatically adds insurance to this amount and then charges duty on the total amount (invoice value converted to local currency plus insurance value)
The same is the case for shipments done FOB, in that scenario, the insurance is auto added like above, and the agent inputs the freight amount obtained from the carrier. However, this freight amount is to be paid out to the carrier directly or collected by the clearing agent to pay the carrier.
I say this amount is never paid out because this amount is auto generated by customs and only duty is collected by them and I have thus far never paid this insurance amount to no party. I have also double checked with the clearing agent if this is something that is due from my side and have been informed that it is not.