Setup and handling of non-deductible VAT

In some countries, depending on the type of supply and the recipient, only part of the VAT charged on purchase invoices is reclaimable. This impacts Accounts Payable and General Ledger.

Setting up tax codes to handle non-deductible VAT

To manage the deductible and non-deductible parts of the VAT, two tax codes must be set up on the Tax Codes form. For example, if your tax for fuel is 20% but only 80% of this is deductible, create two tax codes, one for deductible VAT with a rate of 16% and a second for the non-deductible part, for 4%.

  • To set up the tax code for the non-deductible part of the VAT, specify this information on the Tax Codes form:
    • Specify the Tax System to which this tax code applies.
    • Specify the new Tax Code.
    • Specify a Description for the tax code.
    • Specify a Tax Rate for the tax code.
    • Set the Tax Type to Rate.
    • Select Include Price.
    • Clear Deductible.
    • Specify these accounts: A/R Tax Account, A/R Tax Account in Process, A/P Tax Account.
  • To set up the tax code for the deductible part of the VAT, specify this information on the Tax Codes form:
    • Specify the Tax System to which this tax code applies.
    • Specify the new Tax Code.
    • Specify a Description for the tax code.
    • Specify a Tax Rate for the tax code.
    • Set the Tax Type to Rate.
    • Select Include Price.
    • Select Deductible.
    • Specify these accounts: A/R Tax Account, A/R Tax Account in Process, A/P Tax Account.
    • Set the Next Level Tax Code to the non-deductible tax code. This will be used for purchased items that are subject to non-deductible VAT.

Setting tax distributions on voucher transactions

For voucher transactions where non-deductible VAT is required, the voucher distribution must include two tax distribution lines on the Voucher Adjustment Distributions form:

  • One line with the tax code, tax base and tax amount for the deductible
  • One line with another tax code for the non-deductible part of the VAT.

Specifying non-deductible VAT on purchased items

If a purchased item (through a purchase order) is subject to non-deductible VAT, you must set the non-deductible tax code as a next-level tax code of the deductible tax code.

In the Items form, define the Tax Code for this item to be the deductible tax code. When the purchase order voucher is created using the Generate A/P vouchers form, the system-generated tax distributions include distributions for both the deductible and non-deductible VAT.

There is no way in SyteLine to absorb in the cost of the goods only the non-deductible part of the VAT.

Use the VAT Report form to identify non-deductible VAT for disclosing in your monthly and annual VAT declarations or VAT register

Pro rata VAT calculation

If goods or services include both activities that require VAT and activities that do not require VAT, you can deduct part of the VAT incurred, through either of these methods:

  • Direct allocation, where you directly allocate the input VAT to taxable and non-taxable
  • Pro rata, where a proportional part of the total VAT incurred is calculated

The pro rata method uses this information:

  • Pro-rata results
  • Numerator: Annual amount, excluding VAT, of all transactions with the right to deduct the VAT incurred
  • Denominator: Annual amount, excluding VAT, of all transactions related to the economic activity carried out by the taxpayer
  • Excluded: Transfers of assets used by the entity for its own activity, and real estate or financial transactions are excluded

The pro rata split between deductible and non-deductible for the current year is often an estimate based on the split for the total of the previous accounting year. Then, at the current year-end, an adjustment is made to align the estimated split to the actual split.

This method requires manual entries in SyteLine, as well as calculations made outside the application. A ratio based on the described logic can be calculated and used as multiplier to manually adjust the tax base.

For example:

  • Total amount of all activities = 1000
  • Amount of all transactions related to economic activity = 800
  • Multiplier 800/1000 = 0.8

Across the year you would manually split all transactions in voucher distributions on two lines for VAT deductible and non-deductible.

Example: Tax Code and Voucher Distributions

Define two tax codes:

  • Tax code DVA
    • Description: Deductible VAT
    • Tax type: Rate
    • Tax Rate: 20%
    • Select Deductible
    • Set appropriate tax accounts
  • VAT code NDVA
    • Description: Non-deductible VAT
    • Tax type: Rate
    • Tax Rate: 20%
    • Do not select Deductible
    • Set appropriate Tax accounts

Set up a voucher distribution using the tax codes:

  • Voucher = 100
  • VAT amount = 20
  • 80% of the VAT is deductible and 20% of the VAT is non-deductible

On the voucher header, set the voucher amount as 100 for base and 20 for VAT.

On the voucher distributions, create two distribution for taxes:

  • On the first line, specify the tax base of 80 (80% of 100) and select the Tax Code DVA. This applies 20% VAT on 80; that is, 16.
  • On the second line, specify the tax base of 20 and select the tax code NDVA (non deductible). This applies the non-deductible VAT amount of 20 by 20%; that is, 4.

You must manually adjust your tax declaration for any differences between the estimated split and the actual split of deductible and non-deductible portion of the VAT at the end of the period.