Introduction
Info: Client Responsibilities
We only facilitate the implementation of VAT legislation and are not responsible for how companies apply it.
About VAT Reclaim
Firms that produce or sell products or services may not be able to reclaim all the VAT on their input purchase costs, regardless of whether the items are VAT chargeable or exempt. However, they can recover all input taxes on purchases related to vatable Sales activities (including exempt) together with a proportion of the Input Tax on Overhead Activities (residual input VAT).
Calculate the recoverable proportion based on the previous year's sales using the formula below. The "Value of taxable supplies in the period" includes exempt supplies.
- Value of taxable supplies in the period (excluding VAT) / Total value of supplies in the period (excluding VAT) x 100 = Recoverable percentage of residual input tax
Impact on the GL
Amounts that are not reclaimable for VAT will be added to the Net Cost of Goods before posting. This results in an increased cost to the business in the nominated General Ledger Cost Category and BI Code. The amount posted to the Supplier GL Account will remain unchanged including the Supplier's quoted VAT amounts.
See:
Setting up Partial Reclaimable Tax Codes
Codes can be set up for standard or low rate where you intend to recover a proportion of your Input Tax on your Overhead Purchases. See Gereral Ledger Codes: Tax Codes for more details. Note, such Tax Codes can only be used with purchases.
- Go to Setup > Codes Maintenance > Taxes.
- Click Add New Tax.
- Tick Partial Reclaimable. This flag marks this tax code as being subject to Partial Reclaim. This is to be used in cases where your company has VAT taxable and VAT exempt trading activities and can only recover part of the VAT on purchases that relate to general overheads.
- If a tax code flagged for Partial Reclaim is used on a Purchase Invoice, the invoice postings will be changed based on what is reclaimable. For example, if an invoice has been created with a net value of 100EUR and a tax rate of 23% with a 10% partially reclaimable rates, the invoice will be posted with an increased net of 120.70, a reclaimable tax of 2.30 and a gross value of 123.00.
- The reclaimable tax will appear in the VAT return under Purchases for reclaim and the exempt portion of the VAT will be added to the relevant cost category. The relevance will be determined when GL Code is selected in the purchase invoice.
- This will be posted as part of the Net line and as such the posting will not match the invoice received from the supplier.
- Enter a Partial Reclaim Rate % that you worked out according to the formula in the Introduction earlier. This must be from 0-100% and can contain decimals. This will be used to calculate the portion of VAT that cannot be reclaimed and will not be included in the VAT Return.
- Click Save.
Impact on Purchase Transactions
When a Partial Reclaimable Tax Code is used on a Purchase Invoice, the actual Invoice postings will be modified in the General Ledger according to the Partial Reclaim %.
For example:
| Invoice Value | 100.00 |
|---|---|
| Invoice Tax Rate | 20% |
| Invoice Partial Reclaim Rate | 80% |
| GL Cost Account posting | 104.00 |
| Tax posting | 16.00 |
| Gross posting | 120.00 |
| Supplier (Vendor) Account posting | 120.00 |
For a summary of the GL postings that will result from the Invoice, click Adjusted Posting.
Here are the Transaction Details after posting:
Impact on other systems
Items
Partially Reclaimable Tax Codes cannot be selected for Inventory Items, only Non-Stock (Service) Items. This is because the Cost of Sales and Opening Stock would need to be increased by the non-reclaimable tax amount, interfering with the accuracy of Stock Valuation (using the Average Cost method) and the normal stock postings.
Purchases Invoice-Order Matching and Bank Payments
There is no impact on Invoice-Order Matching. The net and gross totals of the Purchase Invoice in the Invoice screen and the Purchase grid are the totals as per the original Supplier Invoice. This ensures correct matching. Since only the GL postings change, there is no impact on the Order-Invoice Matching process.
The same modified posting logic applies to:
- Batch Purchase Invoices.
- Batch Purchase Credit Notes.
- Sundry Bank Payments.
- Sundry Bank Payments Importing.
VAT Management
Partial Reclaimable Tax Codes do not affect the VAT Return process.