Documentation > MAC-PAC Reference Library > Financials > Accounts Receivable > Key Concepts and Procedures > VAT Processing > How VAT is Calculated

How VAT is Calculated

 

The following steps describe how VAT is calculated for a "typical" sales order.  Notes are provided in parentheses to explain where the processing is different for items entered in Accounts Payable and General Ledger.  This example illustrates basic VAT processing.  Following the description are numerous examples that show the detail of how VAT is calculated and posted in several special circumstances.

1.   As you enter the sales order in Order Processing, you assign a VAT code to each line.  A default value will be assigned by MAC-PAC, based on the hierarchy described in another section of this key concept.  You can override this default as necessary.

2.   The lines associated with each VAT code are added to give a total sales amount for each VAT code.  The amount used for each line is either the gross amount of the amount less any cash discount, depending on the VAT option selected and on whether a discount is allowed.  (  Discount processing is not implemented in GL; VAT is calculated on the total for each VAT code rather than on individual sales order lines to avoid rounding errors.)  Items such as freight, other expenses, and duty may be subject to VAT.  VAT will be calculated for these items if a VAT code is defined on the Warehouse Balance File for the corresponding part.

(These fields are not considered taxable or deductible within Accounts Payable and General Ledger.  To be included in tax processing, these amounts must be entered as regular distribution lines.) 

3.   The totals for each category are multiplied by the appropriate VAT rate, which is retrieved from Reference File category 308.  (The VAT rate is retrieved from category 230 in Accounts Payable and category 114 in General Ledger.)

4.   A separate line for each VAT code is printed on the invoice.  It contains the following information:

·     Total of the taxable amounts from all lines related to this VAT code

·     VAT rate

·     VAT amount

You cannot override these system-calculated amounts within Order Processing or General Ledger.  (You may override calculated amounts in Accounts Payable.)

5.   MAC-PAC stores the VAT total on the VAT History File.  This record also includes the VAT amount subject to discount, the cumulative VAT declared amount, and VAT adjustments. 

6.   The amount of this sale is added to the year-to-date sales for the customer on the Customer Master File.  In an environment where VAT is suspended, the total sales amount for all invoice lines subject to suspension is added to the year-to-date suspension sales amount stored on the Customer Master File.  (Within Accounts Payable, the year-to-date suspension amount is stored on Reference File category 229.)

VAT Surcharge Calculations

In general, the VAT Surcharge amount will be processed similarly in all affected programs, even though each program displays the VAT Surcharge amount in a different way.

All VAT Surcharge calculations will be generally processed as follows:

When calculating VAT, the Bill-to Customer Master record will be accessed to determine if the customer will be charged a VAT Surcharge.  If the VAT Surcharge flag is ‘N’, VAT will be calculated as it currently is done for normal VAT processing.

If the flag is ‘Y’, then the program will retrieve Reference File category 308 using the current VAT code.  If a VAT Surcharge code is associated with the current VAT code, then the VAT Surcharge code is retrieved to determine the correct VAT Surcharge rate and the VAT Surcharge amount will be calculated using the same base amount as the VAT calculation.  The VAT Account assignment record will also be accessed to retrieve the account number to apply to the surcharge amount.

Example 1: 
VAT is calculated at gross, and the declaration point is at the time of invoice (AP).

 

1.   Invoice calculations:

 

Gross purchase amount		200
VAT (10%)		20
Total gross amount		220
Discount (5% of 200)		10
Total net amount		210

 

2.   Accounting entry when vendor invoice is received:

 

Purchases		200
VAT Declarable		20
Accounts Payable			220

 

3.   Accounting entry if payment is made for the gross amount:

 

Accounts Payable		220
Cash			220

 

4.   Accounting entry if payment is made for the net amount without recalculating VAT:

 

Accounts Payable		220
Cash			210
Discounts Gained			10

 

5.   Accounting entry if payment is made for the net amount and VAT is recalculated to take discount:

 

Accounts Payable		220.00
Cash			210.00
VAT Declarable			.91	=        (VAT * discount)        =  (20*10)      total subject to discount           220
Discount Gained			9.09

 

Example 2: 
VAT is calculated at net, and the declaration point is at the time of payment (AP).

 

1.   Invoice calculations:

 

Gross purchase amount		200
Discount (5%)		10
Total gross amount		190
VAT (10%)		19
Total net amount		209

 

2.   Accounting entry when vendor invoice is received:

 

Purchases		200
VAT Intermediate		19
Accounts Payable			209
Discounts Gained			10

 

3.   Accounting entry if payment is made for the gross amount:

 

Accounts Payable		209
VAT Declarable		19
Discounts Lost		10
Cash			219
VAT Intermediate			19

 

4.   Accounting entry if payment is made for the net amount without recalculating VAT:

 

Accounts Payable		209
VAT Declarable		19
Cash			209
VAT Intermediate			19

 

Example 3: 
VAT is calculated at gross and recalculated at the time of payment, and the declaration point is at payment time (AP). 

 

In this example, not all items are subject to discount and a partial payment is made to take advantage of the discount.

1.   Invoice calculations:

 

		Gross Amount	Discount Allowed Flag	Amount Subject to Discount
	Item A.1	50.00	Y	50.00
	Item A.2	150.00	N	0.00
	Total Purchases	200.00
	VAT code V1 (10%)	20.00		5.00
	Item B	100.00	Y	100.00
	VAT code V2 (15%)	15.00		15.00
	Item C	300.00	N	0.00
	VAT code V3 (20%)	60.00		0.00
	Invoice Total	695.00		170.00
	Discount (5% of 170)	8.50
	Total Net Amount	686.50

 

2.   Accounting entry when invoiced:

 

	Purchases		600
	VAT V1 Intermediate		20
	VAT V2 Intermediate		15
	VAT V3 Intermediate		60
	Accounts Payable			695

 

3.   Accounting entry when partial payment 1 is made, taking discount into account:

      Payment 1:       400 (user-entered)

      Discount :             6 (user-entered)

The amount of the payment to be posted to each VAT account is based on the percentage of the total accounts payable amount that is represented by the VAT code.  The formula is:  payment amount (406) times invoice amount for VAT code divided by total amount of invoice (without discount) (695).

 

 

	VAT V1 Declarable		11.68		= 406*(20/695)
	VAT V2 Declarable		8.76		= 406*(15/695)
	VAT V3 Declarable		35.05		= 420*(60/695)
	VAT V1 Intermediate			11.68
	VAT V2 Intermediate			8.76
	VAT V3 Intermediate			35.05

 

            Where:

            20, 15, and 60 are the total VAT by VAT rate.

            420 is the total payment value.

            695 is the total invoice amount.

The discount (6) is also pro-rated based on what percentage of the total amount subject to discount (170) is represented by each VAT code..

 

 

	Accounts Payable		406.00
	Cash			400.00
	VAT V1 Declarable			.18	=   6*(5/170)
	VAT V2 Declarable			.53	=   6*(15/170)
	Discounts Gained			5.29

 

            Where:

            5 and 15 equal the total VAT subject to discount, by VAT rate.

            6 is the total discount taken.

            170 is the total invoice amount subject to discount.

 

		Original Amounts	Open Amounts
	Gross	695.00	289.00
	Discount	8.50	2.50	Discount taken = 6
	Net	686.50	286.50	= Invoice - payment - discount taken = 695 - 400-6

 

4.         Accounting entry when payment 2 is made.

            Payment 2:       286.50 (user-entered)

            Discount:          2.50 (user-entered)

 

 

	VAT V1 Declarable		8.32			= 289.00*(20/695)
	VAT V2 Declarable		6.24			= 289.00*(15/695)
	VAT V3 Declarable		24.95			= 289.00*(60/695)
	VAT V1 Intermediate			8.32
	VAT V2 Intermediate			6.24
	VAT V3 Intermediate			24.95

 

            Where:

            20, 15, and 60 are total VAT by VAT rate.

            289.00 is the total payment value.

            695 is the total invoice amount.

 

If any intermediate VAT balance is left after the final payment (due to rounding), it is reversed out against the declarable VAT.

 

 

	Accounts Payable		289.00
	Cash			286.50
	VAT V1 Declarable			0.07	= 2.5*(5/170)
	VAT V2 Declarable			0.22	= 2.5*(15/170)
	Discounts Gained			2.21	= Total discount taken less VAT discounts

 

            Where:

            5 and 15 are total VAT subject to discount , by VAT rate

            5 is the total discount taken.

            170 is the total invoice amount subject to discount.

 

Example 4: 
Only part of the VAT paid on a vendor invoice is recoverable from the taxing authorities.

 

1.   Vendor Invoice Calculations:

 

		Gross Amount	VAT Rate	VAT Code	% Recoverable
	Item A	50	10%	R1 (recoverable)	80%
	Item B	100	20%	R2 (recoverable)	10%
	Item C	200	30%	R3 (not recoverable)	0%
	Total Sales	350
	VAT R1	5
	VAT R2	20
	VAT R3	60
	Total Due	435

2.         Accounting entry:

 

	Purchases		350
	VAT Receivable (R1)		4		= (5 * 80%)
	VAT Receivable (R2)		2		= (20 * 10%)
	VAT Not Recoverable (N1)		79		= (1+18+60)
	Accounts Payable			435

 

Note:

·     No system-generated posting is made for VAT code R3, since 0% is recoverable.

·     The non-recoverable portion of VAT paid will be posted to a user-defined account.  You must enter this amount as a separate line when you enter the invoice.  The VAT code assigned to that line must be a code you have already set up on Reference File category 230 with type N (for not-recoverable).

Example 5: 
VAT is Included in Sales Price of Item on Customer Sales Order

 

1.   Sales Order Calculations

 

		Gross Amount	VAT Rate	VAT Code
	Item A	220	10%	V1
	Item B	180	20%	V2
	Total Sales, VAT included	400

 

2.   Accounting entry:

 

	Accounts Receivable		400
	VAT Receivable (V1)		20			= 220 - (220/(100% + 10%))
	VAT Receivable (V2)		30			= 180 - (180/(100% + 20%))
	Sales			350		= 400 - 20 - 30

 

Example 6: 
In Order Processing, VAT is calculated at gross, and the declaration point is at the time of invoice.

 

1.   Sales order calculations:

 

	Gross order amount		200
	VAT (10%)		20
	Total gross amount		220
	Discount (5% of 200)		10
	Total net amount		210

 

2.   Accounting entry when invoiced:

 

	Sales			200
	VAT Declarable			20
	Accounts Receivable		220

 

3.   Accounting entry if payment is received for the gross amount:

 

	Accounts Receivable			220
	Cash		220

 

4.   Accounting entry if payment is made for the net amount without recalculating VAT:

 

	Accounts Receivable			220
	Cash		210
	Discounts Taken		10

 

5.   Accounting entry if payment is made for the net amount and VAT is recalculated to take discount:

 

	Accounts Receivable			220.00
	Cash		210.00
	VAT Declarable		.91		(VAT * discount)        =  (20*10) total subject to discount           220
	Discount Taken		9.09

 

Example 7: 
In Order Processing, VAT is calculated at gross and recalculated at the time of payment, and the declaration point is at payment time. 

 

In this example, not all items are subject to discount and a partial payment is made to take advantage of the discount.

1.   Sales order calculations:

 

		Gross Amount	Discount Allowed Flag	Amount Subject to Discount
	Item 1	50.00	Y	50.00
	Item 2	150.00	N	0.00
	Total Sales	200.00
	VAT (10%)	20.00		5.00	= .10 * 50.00
	Sales Order Total	220.00		55.00
	Discount (10% of 55)	5.50
	Total Net Amount	214.50

 

2.   Accounting entry when invoice is created:

 

	Sales			200
	VAT Intermediate			20
	Accounts Receivable		220

 

3.   Accounting entry when full payment is received, taking discount into account:

      Payment 1:       214.50 (user-entered)

      Discount :             5.50

 

	Accounts Receivable			220.00
	Cash		214.50
	VAT Intermediate		.50		= total VAT subject to discount * discount taken           total amount available for discount   = (5*5.50)/55
	Discounts		5.00		= (50*5.50)/55
	VAT Declarable			19.50	= total VAT * payment value - VAT adjustment         total sales order amount   = (20*220)/220 - .50
	VAT Intermediate		19.50

 

Example 8: 
In Accounts Payable, VAT is postponed.  Declaration point is Invoice.

 

1.   Vendor Invoice Calculations:

 

		Gross Amount	VAT Rate	VAT Code	% Recoverable
	Item A	50	10%	P1 (postponed/ partially recoverable)	80%
	Item B	100	20%	P2 (postponed/ fully recoverable)
	Item C	200	30%	P3 (postponed/ not recoverable)
	Total Sales	350
	Total Due	350
	VAT P1	5
	VAT P2	20
	VAT P3	60

Note:    The VAT rate for P3 is given as 30%.  This information is provided so you can follow the calculations.  However, within MAC-PAC, you will need to define this percentage as 0% and enter the VAT due (30% of 200) manually.  For P2, the VAT is fully recoverable.  However, when you define the VAT code on category 230, you will need to leave the percent recoverable at its default value of 0%.  The P1, P2, and P3 VAT codes would be defined as follows on Reference File category 230:

 

VAT Code	VAT Rate	% Recoverable
P1	10%	80%
P2	20%	0%
P3	0%	0%

 

2.   Accounting entry:

 

Purchases		350
VAT Declarable (P1)		4		= (5 * 80%)
VAT Declarable (P2)		20		= (20 * 100%)
Non-recoverable VAT Expense		61		= 60 + (5 * 20%)
Accounts Payable			350
VAT Postponed (P1)			5
VAT Postponed (P2)			20
VAT Postponed (P3)			60

 

Note:

·           The payable portion of the postponed VAT will be paid directly to the government, not to the vendor.  Consequently, the VAT amounts are not added to the accounts payable total.

·           The non-recoverable VAT must be entered as a separate line when you enter the invoice.  (Similar to Example 4.)