VAT is an end-user tax levied on sales of taxable goods and services at varying rates. VAT registered bodies must add the tax to their sales invoices (output tax) but may recover the tax on their purchases, where VAT is levied (input tax). Any difference must be paid to HMRC at agreed intervals –usually monthly or quarterly. There is a statutory duty to account clearly for VAT on external documents and in the company’s records. Needless to say, it is up to the company to collect output tax from their customers.
How Dynamics AX handles VAT
Dynamics AX uses a tax matrix to calculate VAT.
VAT groups
Customers and suppliers are allocated to a VAT group. This would typically indicate the type of tax to be calculated. A UK customer will always be charged UK VAT and will be allocated the code UK Reg C.
VAT Code
The VAT code specifies the type of VAT to be calculated. This is specified against the VAT group, indicating that the code is valid for that group of suppliers or customers. This will not cause calculation of VAT in itself.
VAT Values
One or more VAT values are set against these VAT codes. In the UK, only one value is used.
Item VAT group
Project categories plus purchase and sale items are allocated to an Item VAT group. This would typically be called UK Std. It is the combination of Item VAT group and VAT code that triggers the calculation of VAT.
VAT treatment
VAT will be calculated when a VAT group (from the customer or supplier) and VAT Item Group (from a product or category) both contain a reference to the same VAT code. These groups are copied to a project transaction line or order line and are used by the invoice update process to determine the amount of VAT to be calculated. Both must be present on the line for this to work. The same setup has been replicated in both UK entities.
VAT groups
VAT groups for customers and suppliers are shown here.
The VAT codes that are permitted are seen in the setup window.
Here, it can clearly be seen that there are 4 vat codes that can be charged to UK Reg C (customers).
VAT Code
The VAT code specifies the type of VAT to be calculated. This is specified against the VAT group, indicating that the code is valid for that group of suppliers or customers.
VAT Values
One or more VAT values are set against these VAT codes. In the UK, only one value is used.
Item VAT group
The item VAT group ties together the VAT code and the VAT group to trigger VAT calculations. Project categories plus purchase and sale items are allocated to an Item VAT code. . It is the combination of VAT group and item VAT code that triggers the calculation of VAT. This would typically be called UK Std.
Item VAT group on project categories
VAT is calculated on project sales when the item VAT group is allocated to a project category. This is the setup in VEL:
All project categories that require VAT to be charged will have this code inserted. Internal project codes will have a null value in this field.
Item VAT group on purchase products
Purchases processed through a purchase journal or purchase order will calculate VAT according to the Item VAT group on the product.
Reverse VAT
VAT is not added to purchases from EU suppliers made in the UK. EU law requires that the purchaser accounts for both sides of the transaction, so the VAT is effectively charged and reclaimed in a single reversing transaction. The VAT codes are set up so that the combination of a taxable item and an EU supplier causes +20% and -20% to be calculated.
VAT return
The VAT return for each period must be submitted electronically. Lynn does this by accessing the HMRC website and manually entering the values seen in the sample report below. Each of these values will be obtained from AX reports. HMRC have statutory right of audit (without notice) and can fine the company heavily for mistakes, so it is common practise to physically print out the reports and file them ready for any audit taking place.
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