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European VAT reverse charge

I'd love to drop Quickbooks and use xTuple Postbooks instead, but there's something I can't get quite right.

I'm guessing that I need to create my own VAT rules and that only one rule can be applied per purchase/sale. In the UK, however, VAT has to be recorded as a "reverse charge" for transactions in other European countries.

For example, a UK VAT-registered company buys supplies from a VAT-registered company in a different European country. If this is the case, a double entry has to be created for debit and credit so that VAT ends up being zero. Recording this transaction as zero-rated is just wrong and not acceptable by the tax agency.

I have made further changes to VAT handling in xTuple to allow a Tax Assignment to be marked with reverse charges.  This means the combination of Tax Zone and Tax Type dictates whether reverse charges are applied.  In practice you would mark a Vendor as being in the Reverse Charge tax zone and that would mean any purchases from that vendor could generate the correct charges,

Based on that the system, when calculating or posting the taxation calculated, checks if that zone is a reverse charge zone, and applies a reverse charge against that tax with the net effect, the taxation on that transaction is zero (input less output tax).  I have marked the reverse charge tax line as such so can display this on reports separately.

Not coming from the EU or UK, can someone please give me some form of understanding of what is required to be reported on the Tax Return so I can adjust that report.  What I need is an understanding of what needs to show on input/output taxation lines and whether each line includes or excludes reverse charge entries.  I understand sales versus purchase vat, but do I need to include the purchase reverse charge in the "sales" lines or something else.

Thanks

 

 

1) Can you show us a 'detail' view as well, so I can see how the individual transactions look? (The overview looks resonable to me)

2) Do Misc vouchers now total up into the purchases value? Is the 'Purchases' value a NET (excluding tax) value?

3) This screen is a fixed report.  Will there be an openRPT example showing the same data, so it can be modified easily to get specific tax info required by different regions?

4) What happens to items in a 'none' tax zone, or which otherwise is not set up correctly.  One of the biggest challenges is ensuring that no sales/purchases are 'missing' from a tax return.

5) If there is not one already, a CSV export option of the detailed tax report would be very useful for anyone doing manual checking of tax returns

Thanks and good work!
Andy

Hello,

Check out:

https://www.gov.uk/government/publications/vat-notice-70012-filling-in-your-vat-return/vat-notice-70012-filling-in-your-vat-return

Section 3.2 and onwards gives a clear description of the contents of each 'box' that must be filled in on a standard VAT return.  An example return is below.  The figures are made up, but should be roughly correct:

 

BOX 1 - VAT due on sales and other outputs     1,400.000
               
               
BOX 2 - VAT due on purchases from EC member states   1,200.000
               
               
BOX 3 - Total VAT Due         2,600.000
Box 1 + Box 2            
               
BOX 4 - VAT reclaimed on purchases and other inputs   20,000.000
               
               
BOX 5 - Net value to be paid/reclaimed       17,400.000
Box 4 - Box 3            
               
BOX 6 - Total of sales and all other outputs (ex VAT)   100,000.000
               
               
BOX 7 - Total of purchases and all other inputs (ex VAT)   50,000.000
               
               
BOX 8 - Total of sales and other outputs to EC states (ex VAT)  

15,000.000

 - EU+UK Sales ONLY            
               
BOX 9 - Total of purchases and other inputs from other EC states (ex VAT)

5,000.000

In the above example we can see that:
- Very little is sold within the UK (Box 1 is small)
- Very little is bought from other EU countries (Box 2 is small)
- Lots is bought from within the UK (Box 4 is large)
- The company will make a net refund from the VAT return (box 5 is positive)
- Total sales are large (box 6) but EU/UK sales are small (box 8) so most of the sales must be foreign (US/China/India for example)
- Box 7 (inputs) will exclude some outgoings such as dividends, salaries and payroll taxes
 

Thanks a lot @anderson. That sounds incredibly helpful to me.

 

Just to clarify further:

- For any purchase from the EU, VAT amounts would need to show up as acquisitions in Box 2 (a purchase from other EU member is called "acquisition") and as purchases in Box 4. The value of the purchase (without VAT) needs to be reported in Boxes 7 and 9.

- If the reverse charge rules are triggered, then the VAT charge would also need to be reported in Box 1, and the value of the sale in Box 8.

 

In my case, I've been managing with Tax Zones to see which sales/purch are from the EU. Provided that xTuples manages sales and purchases, working out the boxes would be easier.

Thank you for the extra information.  I really need to deliver a generic Tax Return that provides useful information, but can be modified to meet specific country information.

Tax Zones are the correct means to identify what taxes are applicable and also whether they are relevant for the reverse charges.

The current Tax Return I have delivered for xTuple 4.10 (not released yet) displays Sales value, Purchase value, VAT sales tax, VAT purchase tax as well as tax exempt sales and purchase values.  I think I just need to add in the value of reverse charges to the report and you should have enough information to fill in the tax return, or to be able to modify the Tax Return report to exactly what you need.

 

Bearing in mind my earlier comments about keeping the screens fairly generic so they can later be customised to specific country requirements.

I have set up Input Tax Zone, Output Tax Zone, and Reverse Charges Tax Zone and processed some transactions in all categories.

The attached screen shows a proposed Tax Return which can be used to determine the correct information for the tax authority.   In this example I have various Sales which are VAT applicable (Output VAT), I have Purchases which are made up of VAT applicable purchases (Input VAT) *including* those from the Reverse Charges Tax Zone (EU countries).  I have also split out the reverse charges that were automatically generated and am displaying these in the Sales (or Output VAT) column which has the effect of offsetting the VAT incurred on purchases.  The net effect is a small amount of VAT required to be paid.

Does this seem reasonable?  Thanks

 

If it would be quick to implement, then perhaps it'd be improve clarity to have the two lines as something like the following when there have been reverse charges:

Purchases(inc. Reverse Charges)    $115      VAT $15

Purchases (Reverse Charge)       VAT $-15

 

 

Otherwise, I'll finish by saying thank you very much for implementing this. It's much appreciated!! :)

1) Can you show us a 'detail' view as well, so I can see how the individual transactions look? (The overview looks resonable to me)

>>> Absolutely.  This is a NEW Tax Return report in xTuple 4.10.  The original Tax History report has summary and detailed views which show transactions in detail.

2) Do Misc vouchers now total up into the purchases value? Is the 'Purchases' value a NET (excluding tax) value?

>>> All the figures displayed (Sales/Purchase) are excluding tax

3) This screen is a fixed report.  Will there be an openRPT example showing the same data, so it can be modified easily to get specific tax info required by different regions?

>>> Yes there is an associated printable report that shows the same information - that is intended to be customised to suit different regions/countries and in theory should allow a straight print from the system and copy the values into the necessary Tax forms.

4) What happens to items in a 'none' tax zone, or which otherwise is not set up correctly.  One of the biggest challenges is ensuring that no sales/purchases are 'missing' from a tax return.

>>> According to my design there needs to be a Tax Exempt ('none') Tax Zone where the tax code is configured to be zero % VAT.  This *does* get included in the report I showed above (I should have put an example in).  If the tax configuration is incorrect and it does not fall into a taxable or non-taxable zone, then no data is generated and it will not show on the report.  Not much I can do about that.

5) If there is not one already, a CSV export option of the detailed tax report would be very useful for anyone doing manual checking of tax returns

>>> As with all xTuple displays, you can right-click on the Tax History report and export the data to csv.  Thus dropping the detailed records out to csv.

@anderson, your report looks great. Thanks for that.

 

The report looks goos enough to me (provided the documentation is updated to clarify whether or not reverse charges are being added to sales/purchases already)

I also have one question: How do reverse charges appear in the Tax history? Is it possible to query Sales/Purchases using the radio buttons and still get the detailed list with reverse charges in both cases? The current behavior (and my major problem) is that purchases from the EU would only show for purchases.

-

The Tax Return displays purchase amount (excl.) and VAT from EU states in the Purchases row.  It then displays the reverse charge as the offset as a separate (clear) row and the offset in the Sales oir output VAT column.  The net effect is the VAT on reverse charges shows in both purchase and sales VAT columns and is negated.  This was my understanding of the requirements (based on the UK websites provided).

The Tax History Report will not show anything special at the Summary level - the VAT is negated.  However at a Detail level, the reverse charge transaction is displayed as two lines.  A negative line for the original purchase VAT and a second positive line for the reverse charge.  At present the description on the Tax History Detail would be something like the following:

Purchases    $115      VAT $15

Purchases (Reverse Charge)       VAT $-15

 

 

I will give some thought to this request.  Even though they originate from the same transaction, they end up being distinct lines.  I added a flag to the reverse charge so I could identify it, but the original line is not flagged.

Hi,

We are incorporating additional VAT support in the upcoming xTuple ERP version 4.10.0 release (beta coming soon). In anticipation of those updates, we created a video which gives a nice overview of VAT support in xTuple. Here's a link to that video, which is hosted on the xTuple University site: http://xtupleuniversity.com/basic-vat-setup-and-usage.

Best regards,

Pierce

Hi Pierce,

 

Thanks a lot for the info. I have watched the video but it doesn't mention reverse charges. Without them, I don't know how it's possible to report VAT for purchases and/or sales outside the UK. Do you know whether these will be included in 4.10?

I believe you are correct in that Reverse Charges would not "automatically" be handled even after the 4.10 changes.   I am just giving consideration to what might be required in xTuple to support the change as I suspect it would be fairly simple to implement.

Hi, holpi:

We've got some updates/improvements to our VAT handling coming in our next release, version 4.10. Have you seen our latest video, which previews those 4.10 features? Here's a link: http://xtupleuniversity.com/basic-vat-setup-and-usage.

Best regards,

Pierce

I'm not sure if this is still being considered, but after trying different options I can see that xTuple can't handle VAT reverse charges at all at the moment.

In the UK at least, reverse charges have to be reported both as input and output. Typically, a reverse charge transaction should appear twice in the VAT return (one for the sales box, and one for reclaimed VAT on purchases). For what I can gather, this is impossible with xTuple because even if I add two distributions for sale and purchase, the voucher would add those as VAT due (i.e.: double the VAT due). The amount to be distributed would not be correct then.

So far, I'm 'getting by' by creating a Receivable VAT account to which I distribute a debit for each reverse charge in the Liability VAT account. This has the advantage of zeroing VAT due in the voucher. However, it also means VAT reports will always be inaccurate as reverse charges will appear in either purchases or sales, but not both. Also, I get a concerning warning when I associate a tax code with an asset account (VAT receivable), so there may be more side effects I'm not seeing right now.

In summary, reverse charges for purchases appear four times in the VAT return. Two for VAT due and reclaimed, and two more for the value of the sale and the purchase. A good reference is https://www.gov.uk/government/publications/vat-notice-70012-filling-in-your-vat-return/vat-notice-70012-filling-in-your-vat-return#para46

To make matters worse, the problem is not only about reverse charges. EU VAT liability will often have to processed like this for most purchases between VAT registered businesses.

I've only been using xTuple for a few weeks, so I may be wrong of course (and hope to be!)

Thanks again Pierce, but I'm afraid 4.10 doesn't seem to handle this problem either. I've even downloaded the beta version from sourceforge to test it out.

The problem remains that VAT transactions are considered as EITHER sale or purchase. For reverse charges and some EU VAT charges, xTuple should be able to know that they are BOTH sales/output and purchases/input. It's this "both" that xTuple can't handle

holpi,

Thanks for raising this apparent gap in our VAT handling. I've filed bug 27338 to track it.

Gil

Hi Holpi,

Does your report really need to many entries for reverse charge?  The actual (UK at least) VAT report that has to be submitted only requires the total value of EU purchaser/sales and the total VAT paid/collected.

We use a special tax zone for EU registered (reverse charged) companies.  This has a 0% tax, but allows the sales/purchases to be recorded and separated out for the required submission to HMRC

That said, we do produce our own VAT report, as xtuple (4.4.0) does not track net values of purchases when made via a misc voucher (we pull these manually from the data tables) as otherwise our "Total purchases and other inputs" declaration would be too low.  If we never used misc vouchers though, the correct figures could be obtained from xTuple.