Value Added Tax (VAT) Setup Requirements

Overview

This article describes how to configure Rootstock for Value Added Tax (VAT). As noted in the Value Added Tax (VAT) Overview, a user needs to decide on the following:

• Will the Purchase Order Price be quoted Excluding or Including VAT

• Will the Sales Order Price be quoted Excluding or Including VAT

• At what point will VAT be recognized? In various VAT jurisdictions, VAT may be recognized at different points in the transaction life cycle. For example, in one jurisdiction, it may be recognized upon receipt of the goods/services, yet in another jurisdiction, it may be recognized only upon the Invoice Date. Rootstock allows a user to set the recognition option in System Defaults. (see Value Added Tax (VAT) - Recognition Option for more explanation). Options are:

  • Upon Receipt - VAT liability is recognized upon PO Receipt

  • Upon Invoice - VAT liability is recognized upon PO-AP Match

  • Upon Payment - VAT liability is recognized upon Vendor Payment

• Is there any VAT apportionment? In certain jurisdictions, the full VAT amount on purchases may not be claimed when a company has both Sales that are subject to VAT or VAT exemption. In some countries where this is the case, the VAT claimed on purchases may only be claimed in the proportion of Sales subject to VAT as a  % of Total Company Sales. The VAT apportionment is set in Value Added Tax (VAT) Class.

Once these decisions have been made, the following steps need to be followed:

System Defaults

Navigation - System Defaults

• In the System Defaults object, the VAT functionality must be activated, and the VAT recognition point must be set:

  • Set 'VAT Active' to True in System Defaults.

  • Select the appropriate VAT Recognition Option for Input VAT - Options are "Upon Delivery", "Upon Invoice", and " Upon Payment".

Company Master

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• Set 'VAT Active' to True to activate VAT processing at the Company level. This can be set to True when the 'VAT Active' is True on the System Default.

  NOTE  This 'VAT Active' is not visible in UI, the user has to edit it using inline edit from the Company Master List View.

GL Chart of Accounts

Navigation - GL Accounts (Chart of Accounts)

• Ensure GL Accounts (See GL Accounts (Chart of Accounts) ) for VAT are set up for use in the Tax location / VAT class objects. The following GL Accounts should be created:

  • Output VAT

    • Set the 'AR Account Type' field to 'Tax'.

    • Set the 'VAT Account' field to:

      • 'Outgoing VAT' - when separate accounts are used for Output and Input VAT.

      • 'Both Incoming and Outgoing VAT' - when a single GL Account is used for both Input and Output VAT.

  • Input VAT

    • Set the 'AP Account Type' field to 'Tax'.

    • Set the VAT Account field to:

      • 'Incoming VAT' - when separate accounts are used for Output and Input VAT.

      • 'Both Incoming and Outgoing VAT'- when a single GL Account is used for both Input and Output VAT.

  • VAT Clearing

    • Set the 'AP Account Type' field to 'None'

    • Set the 'VAT Account' field to 'None'

Tax Locations

  NOTE  When the Sales Order Price excludes VAT (i.e., VAT is to be added to the Sales Order Price), the Tax Location functionality is used to calculate the VAT to be added to the Sales Order price.

Navigation - Tax Locations

• Create Tax location as required (see Tax Locations). Multiple Tax locations may be required for different VAT rates and different classes of VAT.

  • When setting up a Tax location for VAT purposes, be sure to set/link the associated VAT class in the 'Associated VAT Class' field in the Tax Location object (see Tax Locations). This is required for VAT reporting by class.

  • Enter the appropriate tax rate in the Federal Tax Rate field and the associated GL Output VAT account in the 'Federal Tax Account' field. Users should ensure that the Tax location is appropriately named (for example - "Standard VAT - 12%").

Division Master

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• Assign the relevant VAT class to the Division Master.

• Set / Assign the primary VAT class for Purchases - 'Primary VAT Class for Purchase Orders' field. When the System Default 'VAT is Active' is checked, this 'Primary VAT Class for Purchase Orders' field is mandatory.

• If the Sales Order Prices Include VAT (i.e., VAT is added to the SO Price) - Assign / Set the Primary VAT Class for Sales Orders field. If the Sales Order Prices Exclude VAT - Leave the 'Primary VAT Class for Sales Orders' field blank.

SO Control

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When the company uses Sales Order Prices, which include VAT as a company-wide standard, only the VAT Class is used to determine the VAT for Sales Orders and not the Tax Location process, to prevent a user from incorrectly using the Tax locations in this instance, the 'Tax Location is Not Required' field in Sales Order Control should be checked.

In addition, where a company uses both Sales Order Prices, including VAT and Sales Order Prices, excluding VAT, the 'Tax Location is Not Required' should be checked. This will allow the user to override the Sale Order Tax Location [Prices exclude VAT] in the Sales order line to be set to 'None' and allow the user to assign a VAT class [Prices include VAT] to the SO Line. See Value Added Tax (VAT) in the Sales Order Process.

Purchase Order default VAT Class settings
 

• For Procure to Pay, users can set the following override VAT Classes (the software checks and uses the VAT class, if found, in the following order):

  • Item / Vendor Master - 'Override VAT Class' field in the "MISC" Tab.

  • Vendor Master - 'Override VAT Class' field in the "Accounting" Tab.

  • Purchase Item Master - 'Override VAT Class' field.

  • PO Commodity Code - 'Override VAT Class' field in the "Options" Tab.

  • Division Master (see above - set in Division Master - 'Primary VAT Class for Purchase Orders' field).

  • Note the default VAT Class can be overridden in the Purchase Order Line.

Sales Order default VAT Class settings (used when Sales Order Price INCLUDES VAT)
 

• For Order to Cash, users can set the following override VAT Classes (the software checks and uses the VAT class, if found, in the following order):

  • Customers - 'VAT Class' field in "Sales Order Defaults" Tab (Used if the VAT Class division matches the Sales Order's division, otherwise the logic moves next in the hierarchy).

  • Shipping Zone Product Group - 'VAT Class' field.

  • Shipping Zone Division Detail - 'VAT Class' field.

  • Shipping Zone - 'VAT Class' field.

  • Products - 'Override VAT Class' field in the "Order Processing" Tab.

  • Product Groups - 'Override VAT Class' field in the "Order Processing" Tab.

  • Division Master (see above - set in Division Master - 'Primary VAT Class for Sales Orders' field).

  • Note the default Tax Location can be overridden in the Sales Order Line Ship-To Settings Tab.