Non-Deductible VAT

Note:

If you use the Avalara VAT Reporting integration and you want to apply non-deductible tax, see Non-Deductible VAT for Avalara VAT Reporting.

This topic details two common scenarios for applying non-deductible tax. Both scenarios below are in Euros. You can apply this solution to most countries in the European Union, such as Belgium or Spain.

The general ledger accounts used in both scenarios are examples based on a standard chart of accounts.

Scenario 1

A payable invoice where VAT is 100% deductible.

Example

Net Value VAT 21% Invoice total
1,000 210 1,210
  1. Create an invoice and add the full VAT amount to the expense. In this scenario you must enter an expense or product line with a total value of 1,210 EUR.
  2. Create a specific tax code for non-deductible tax with a rate of 0%.
  3. Enter that tax code to the expense or product line.
  4. Post the invoice.

The transaction looks like this:

General Ledger Account Debit Credit
5100 - COGS - Materials 1,210  
2171 VAT Input Non-Deductible

0

  
2000 Accounts Payable Control   1,210

Scenario 2

A payable invoice where VAT is 50% deductible.

Example

Net Value VAT 21% Invoice total
1,000 210 1,210
  1. Create an invoice and add 50% of the VAT amount to the expense. In this scenario you must enter an expense or product line with a total value of 1,105 EUR.
  2. Create a specific tax code with a rate of 50%.
  3. Enter that tax code to the expense or product line.
  4. Post the invoice.

The transaction looks like this:

General Ledger Account Debit Credit
5100 - COGS - Materials 1,105  
2171 VAT Input Non-Deductible 105  
2000 Accounts Payable Control   1,210