Introduction

Firms that produce or sell products or services:

• May not be able to reclaim all the VAT (tax) on their input purchase costs, regardless of whether the items are VAT (tax) chargeable or exempt.
• Can recover all input taxes on purchases related to vatable Sales activities (including exempt) together with a proportion of the Input Tax on Overhead Activities. Calculate the recoverable proportion based on the previous year's sales using the formula below. The "Value of taxable supplies in the period" includes exempt supplies.
  
   

Amounts that are not reclaimable for VAT (Tax) will be added to the Net Cost of Goods before posting. This results in an increased cost to the business in the nominated General Ledger Cost Category and BI Code. The amount posted to the Supplier (Vendor) GL Account will remain unchanged including the Supplier's (Vendor's) quoted VAT (Tax) amounts.

See:

Partial exemption (VAT Notice 706) - GOV.UK (www.gov.uk)

 How do I use Code Maintenance to Control the Behaviour of the System? 

 How does the System Facilitate VAT Management (U.K. & Ireland)? 

Setting up Partial Reclaimable Tax Codes

You can set up Codes for Standard Rate, or Low Rate where you intend to only recover a proportion of your Input Tax on your Overhead Purchases. Follow the instructions detailed below with reference to Gereral Ledger Codes: Tax Codes.

In this example, there is a new Partial Reclaimable Tax Code at the Standard Rate of Tax. This appears on the Supplier (Vendor) Invoice in respect of Overhead Items. Note, you can only use such Tax Codes in the Purchasing system. 

1. Go to Setup > Code Maintenance > Taxes.
2. Tick Partial Reclaimable. 
3. Enter a Partial Reclaim Rate % that you worked out according to the formula in the Introduction earlier.  
4. Click Save.
   
   

How Partial Reclaimable Tax Codes Impact Transactions 

If you use one of the Partial Reclaimable Tax Codes on a Purchase Invoice, the actual Invoice postings will be modified in the General Ledger according to the Partial Reclaim %.

For a summary of the GL postings after the Invoice is passed and posted, click Adjusted Posting.
 

Here are the Transaction Details after posting:
 

How Partial Reclaimable Tax Codes Impact other systems

Items

You cannot select Partially Reclaimable Tax Codes on Inventory (Stock) Items, only on Non-Stock (Service) Items. This is because the Cost of Sales and Opening Stock would need to be increased by the non-reclaimable tax amount, interfering with the accuracy of Stock Valuation (using the Average Cost method) and the normal stock postings. 

Purchases and Banks

There is no impact on Invoice-Order Matching. The net and gross totals of the Purchase Invoice in the Invoice screen and the Purchase grid are the totals as per the original Supplier Invoice. This ensures correct matching. Since only the GL postings change, there is no impact on the Order-Invoice Matching process.

The same modified posting logic applies to:

• Batch Purchase Invoices.
• Batch Purchase Credit Notes.
• Sundry Bank Payments.
• Sundry Bank Payments Importing.

VAT (Tax) Management

Partial Reclaimable Tax Codes do not affect the VAT (Tax) Return process.