[How to] Setup European 'Use Tax' mechanism Concept and Configuration

Dear Dynamics 365 lovers,

This blog is about “Use Tax” Function in Microsoft Dynamics 365, it is similar to reverse charge mechanism in Europe.

For countries in Europe, it is mandatory as per legislation for inter country VAT is maintained with reverse charge mechanism.

The Idea is to transfer the VAT reporting responsibility from seller to buyer, but buyer usually can off-set tax. So in VAT return it is recorded on both sides (input and output) as it is required by the legislation but the result is '0 in accounting.

Let’s explore the entry first

Above mentioned entry is offsetting with each other VAT input and output, as it is recorded in both side, at the end it is ‘0’ in accounting for VAT reporting.

Let’s explore the setup now

Step 1: Create sales tax code as per the value for particular country (I have created 10%)

Step 2: Create Item sales tax group and add the tax code to the new Item sales tax group, you can add the code to the existing group

Step 3: Create sales tax group and add the tax code to the group, you can add the code to the existing group

Step 4: This is very important step, after adding the tax code to the sales tax group, kindly mark the code as “Use tax”

Step 5: For posting to the both side – Input VAT, output VAT in same transactions, add the ledger account to “Use tax expense” field and “Use tax payable” field from Ledger posting group

The setup is done

Now book one transaction to see if the expectation is met

See below result of voucher, which denotes Sales tax input and output both reported in same transactions as per the expectation. 

This is it, I hope I have been able to clarify the concept from accounting and configuration point of view.