Withholding tax receivable

Yes. But we should have default names that are understandable.

Hi Lubos,

Do we have a way to clear the withholding tax receivable during payment of Income tax to government using the “New Payment” tab instead of making journal entries.

No. Withholding tax receivable records amounts your customers must pay to the tax authority on your behalf. Such amounts represent taxes withheld at the source and will never be paid by your business. For a thorough explanation, read the Guide: Account for withholding tax on sales invoices | Manager.

In our country this is deduction on our income tax every quarter. So every time we pay our quarterly income tax we deduct the withholding tax receivable. So i expect that there will be clearing on payment tab for this withholding tax receivable.

@Markwin, I believe you misunderstand the purpose of Manager’s withholding tax feature. It has nothing to do with income taxes owed by your business or your employees, except that advance collection of amounts that will eventually be payable as income tax may be an underlying motivation of your tax authority for instituting withholding tax.

Income taxes (of the business) are levied on your profit. Withholding taxes in Manager (also called tax withheld at the source) are amounts withheld by your customers from payments they would otherwise make to you against sales invoices. Or, they are taxes you withhold from payments to your suppliers against purchase invoices. They do not affect your income tax liabilities and are not involved with periodic payments of income tax. They are simply a way for the government to collect taxes with greater assurance. They make it harder to hide profits, because more entities are involved in reporting.

A quick review of withholding tax regulations in your jurisdiction indicates they are all related to income taxes accrued and paid. Accordingly, you should not be using Manager’s withholding tax feature to account for them. Taxes withheld from employee compensation, for example, should be handled as payslip deduction items.

Please provide guidance on how I can handle the below scenario:

My client is a witholding tax agent and is therefore mandated to deduct some tax payments.
I need to pay a VAT (sales Tax) and also i have an some income tax deducted against each invoice.

Therefore my client withholds 2% of the invoice value for VAT and further withholds 3% of the invoice value for income tax. I need to file the VAT payable monthly and reconcile this while the income tax is done every 6 months.

How do i enter this invoice payments and manage the withholding VAT and withholding tax separately in manager to avoid confusion and make it possible to reconcile VAT payable separately from Income tax payable.

Thank You for the continued support.

Did you read the Guide: Account for withholding tax on sales invoices | Manager? Withholding tax is handled completely separately from VAT. Follow the procedures for each in the Guides and they will be separately accounted for.

Your post seems to confuse actions appropriate for customers with actions appropriate for suppliers. Presumably, your client is your customer. So you—not he—adds VAT to an invoice via tax codes. Then you instruct him—on the sales invoice—to withhold the appropriate withholding tax.

Dear Tut,
Apologies for being a bother.
My client is a withholding agent for both VAT and Income tax.

So I need to be able to handle both withholding tax and withholding vat.

It is a % of the respective tax so if I can have this feature please for VAT also when doing the receipt. :slight_smile:

What do you mean by “withholding VAT?” VAT is assessed at a line item level. You do not normally withhold VAT. You collect it from customers or pay it to suppliers as part of the total transaction cost. You remit or receive the difference to or from the tax authority. Read the relevant Guides.

If, by chance, your government imposes some kind of withholding on transactions subject to VAT, you would still apply the VAT tax code as normal. Then you would include the VAT withholding in the total percentage or amount calculated for sales invoices. And you would enter either two line items or a combined total line item for VAT withholding on purchase invoices.

If this does not answer your question, you need to furnish more details about exactly what you are trying to accomplish.

Dear Tut,

In my case, my client is authorized to withhold a % of the VAT charged for each transaction. They declare this and pay to the tax authority on our behalf.
We do apply the VAT code as normal but when receipting an invoice, I have 2 withholding transactions to consider: The normal income tax withheld and the VAT withheld.

What I am requesting for is the ability to have a check box for VAT withholding similar to the existing withholding tax checkbox that is currently available.

You need to explain this in more detail (unless all my guesses later in this post are correct).

First, who is this “client?” Are you an accountant selling services to your customers using Manager, so this “client” is—in Manager’s usage—a customer of your business? If so, are you discussing transactions between your business and the customer’s (client’s) business? Or are you referring to transactions this “client” has with other businesses? Who is the buyer? Who is the seller?

Or are you just a merchant selling goods or services and this “client” is an ordinary customer?

Second, are these transactions on which your “client” is authorized to withhold a percentage of VAT sales or purchases?

Third, when your “client” pays the withheld amount to the tax authority on your behalf, are you being treated as a buyer or a seller?

If I try to read between the lines of your posts, it seems that perhaps you are selling goods or services to a customer. VAT is assessed on your sale. Your customer is required to withhold X% at the source against your future income tax due. And your customer is also required to withhold Y% at the source against your output VAT. (Both of these withholding percentages would be functionally the same. They are measures to get money to the tax authority sooner and more reliably than waiting for you to make your tax filings.)

If all that is correct, you simply need a withholding percentage equivalent to the compound rate. In determining your rate, remember that Manager will calculate withholding on the total invoice amount, including VAT. But you want VAT withholding to be calculated only on the VAT portion of the total. A little algebra will tell you what the compound rate is. It would be good practice to explain the calculation in a Notes field on the sales invoice, especially if your customer must pay to different tax authorities or on different schedules for the two components.

After you are notified the customer has remitted tax on your behalf, you will want to transfer their payment of VAT to your VAT tax liability account so you will know how much remaining liability you have. Use a journal entry for this.

Hello Tut,
Thank you for your response and apologies for the late reply.
We are the seller of goods and services. The client is the buyer. We are the ones using Manager as our accounting system.

Your customer is required to withhold X% at the source against your future income tax due. And your customer is also required to withhold Y% at the source against your output VAT. (Both of these withholding percentages would be functionally the same. They are measures to get money to the tax authority sooner and more reliably than waiting for you to make your tax filings.)

This is correct.
At the point where the customer makes the payment, the withheld tax is also remitted and we get notified by the tax authorities automatically.
I understand the suggestion to use the journal however, can we consider the following:

  1. At the point of revenue recognition, we invoice the full amount and add VAT.
  2. At the point of remittance, the client will pay and provide a schedule of payments.
  3. The tax authority also sends notification of the received VAT withheld and income tax withheld.
  4. It is at this point when I want to receipt payment of the invoice that I need help. Income tax withheld can be moved to the withholding tax receivable account simply by amending the invoice and entering that data when acknowledging the cash receipt.

I would like to have the process similar to the income tax process.
I have created a withholding vat receivable current account and want to have this updated when booking the cash receipts. Similar to the one for withholding income tax.
On the same breadth, i would like to differentiate VAT and income tax liabilities on the tax accounts on the balance sheet and have therefore created the 2 liability accounts for that.

Convenience and ease of use is what I am trying to achieve.

You should never amend the invoice to account for tax withheld or paid on your behalf. That will distort the withholding calculation itself. By using Manager’s built-in withholding feature, the reduced balance to be paid by the customer is automatically shown on the sales invoice. The customer’s Accounts receivable balance is reduced, as well. The customer should pay the reduced balance and you should receive the reduced balance, at which point the receivable will be zeroed out.

Settlement of taxes due or refundable is separate. You can use the procedure described in this Guide to record customer remittance to the tax authority. That will transfer remitted amounts from Withholding tax receivable to Withholding tax. You can leave amounts destined for application to income tax there. Amounts destined to cover VAT assessed to your customers can be transferred by journal entry to the tax liability account you are using for VAT.

Note in the description above that you only need to create the VAT tax liability account. (You should already have that by now, since I assume you are charging other customers for VAT.) The withholding for income tax is never a liability, but is always an asset. It begins as an asset your customer holds for you, to remit to the tax authority on your behalf. It is then transferred, after the customer remits, to an asset you can apply against your income tax due. At that point, the asset is being held for you by the tax authority.

Thanks for the response Tut

As explained, i am able to account for withheld tax alright. I just want to use the same method to account for withheld VAT and avoid the journals.

You will not be able to avoid the journal entry, because the withholding tax accounts are built into the program and function in a certain way. Meanwhile, the VAT must be offset against your liability in a separate account. Bypassing the built-in withholding tax feature would be feasible, but much more complex, requiring you to circumvent the entire tax module.

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Thanks Tut,
I will have to figure out the easiest way to handle this in bulk.
I hope in future this feature gets some consideration.

As for the VAT tax liability account, I renamed the initial tax liabilities account to VAT Liabilities and added another account for income tax liabilities. Both are grouped under tax liabilities group. I hope this wont break things later.

I do not believe you will see further action on a feature that is already fully developed and functional

You seem to have missed the point that the withholding tax feature works only with the automatically activated Withholding tax receivable and Withholding tax asset accounts. This is hard-coded into the program. So whatever you are doing with this income tax liability account (a) bypasses the withholding features of the program and (b) incorrectly classifies withheld tax as a liability instead of an asset.

Thanks for the continued assistance and the patience.

Perhaps you can clarify your recommendation here on having separate Income TAX and VAT accounts since i noted that the VAT entries were automatically going into that account also.

It is necessary for us to account each differently due to various timelines with the tax authorities.

Your VAT tax liability account is where you post all transactions to which you applied the VAT tax code. The account offsets input versus output VAT to yield the net liability. This account is usually classified as a liability account because most businesses collect more VAT from their customers than they pay to their suppliers. In the rare case where the opposite is true, it can be reclassified as an asset account. Read Create and use tax codes | Manager.

The Withholding tax receivable account is an asset account where the amount held by your customer on your behalf for eventual remittance to the government is recorded. There is no offsetting. There is only the transfer to Withholding tax after your customer pays the government. At that point, the balance of that account can be applied to your tax filing. Read Account for withholding tax on sales invoices | Manager again.

The withholding tax feature built-in ordinarily favours income tax and not VAT.

In most jurisdictions, withholding tax is applicable on only income tax. The amount deducted is used to reduce the final income tax payable by the taxpayer (the service provider or goods supplier).
With the above, the built in function works perfectly. The user of manager will click on withholding tax either at the time of invoicing or at a later date when the final withholding amount is deducted. This will then be moved from withholding tax receivable to withholding tax when the certificate of payment is received from the customer or notification from the tax authority.

Bearing in mind that income tax result from the profit generated from operations and VAT is tax being collected on behalf of Government (meaning - we are just acting as agent of collection), they need to be accounted separately.

VAT is charge on the services provided referred to as Output tax and on purchases referred to as Input tax.

Normally, the Output will be collected and the Input tax paid in FULL. When filling your returns monthly, the difference being the Net VAT Payable is paid to the Tax Authority.

THE REAL ISSUE
Some jurisdictions require a percentage (%) of the Input VAT to be withheld when payment is being as an authorised agent.

Now lets consider the above in the records of the service provider using Manager.io.

When VAT is charge on the service provided (Output VAT), the Tax payable (VAT payable) on the Financial Position is credited (Increased) and can only be reduced — aside payment — when we consumed a service or product and are charged Input VAT.

If the Company we have charged Output VAT is a withholding VAT agent, it will withhold VAT in addition to income tax. In accounting for this, you can only put the 2 (Withholding income tax and Withholding VAT on Output) together as withholding tax which will move to withholding tax receivable and when payment certificate is received, its further transferred to withholding tax receipt.

Meanwhile, the tax law provides that the withheld amount should be used to reduce the Net VAT payable, same way as the Input VAT.


@lubos @Tut

Can’t we have 2 withholdings (Withholding on income and withholding on Tax) so that the withholding VAT receivable, when transferred to withholding VAT receipt will reduce the Net VAT Payable directly on monthly.

The alternative is a Journal Entry on each sale transaction directly to the Tax payable account (VAT) or from the withholding tax receivable/Withholding tax receipt (income tax purpose) to Tax payable.

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