European Union Reverse Charge Function and its Configurations, Operations, reviewing the posted transactions

Dear Dynamics 365 Lovers,

In this article, I have articulated and simplified the reverse charge Vat function, its step by step setup, operations and reviewing the posted transactions.

lets explore~

What is reverse charge VAT in European Union?

When a transaction is subject to Reverse Charge, the recipient of the goods or services reports both their purchase (input VAT) and the supplier’s sale (output VAT) in their VAT return.  These two declarations offset each other from a cash payment point of view, but the authorities have full visibility of the transactions.

Step by Step Configuration to meet this requirement in Microsoft Dynamics 365 FO.

1. Create two sales tax codes, one with Positive value and another with negative value (both must be same value but opposite sign)

Note- for the negative sales tax code value, you need to enable the field “Allow negative sales tax percentage” to Yes

2. Create Sales Tax group and add the above two codes into that group.
3. Mark the negative Code as reversed charge (without this, this function wont work)

4. Create Item sales tax group and add the above two codes into that group.

Add the Item sales group to the released product which you will be using for vendor invoice.

The configuration is done 

Operations and review posted transactions

When you are creating vendor Invoice with the sales tax group and item tax group combination you have created, the transaction will look like below.

• It has to show the negative tax code with “Sales tax Payable” direction.
• It has to show the positive tax code with “Sales tax receivable” direction.

Once the invoice is booked, it shall look like below. 

• The negative tax code will come up with “Reverse Charge” ticked
• It has to show the negative tax code with “Sales tax Payable”
• It has to show the positive tax code with “Sales tax receivable”

Company can now settle the sales tax and it will offset with each other, however this visibility is mandatory for company to Tax authority as per the law in EU.

I hope this article will help you to understand the reverse charge vat concept. 

For more information, kindly check the Microsoft Documentation to review

https://docs.microsoft.com/en-us/dynamics365/finance/localizations/tasks/gb-00002-item-sales-tax-groups-reverse-charge-vat

https://docs.microsoft.com/en-us/dynamics365/finance/localizations/emea-reverse-charge