When you purchase goods or services from a vendor, you usually pay applicable tax amounts to the vendor, who then remits those tax amounts to a tax authority. If the tax amounts are deductible, you can recover them from the tax authority. In your General Ledger, you will have two related accounts:
- An input tax account where you record tax amounts you have paid to vendors that are recoverable from tax authorities.
- An output tax account where you record amounts owed to tax authorities.
In some cases, when purchasing goods or services, you may need to remit applicable tax amounts directly to a tax authority, instead of paying them to the vendor. Such tax amounts are called reverse charges. If the tax amounts are deductible, you do not need to pay them, but you may want to record them in the two accounts discussed above.
When you post an invoice in Accounts Payable that includes reverse charges, the reverse charges amount is recorded in both your input tax account and your output tax account.
The tax remittance model for reverse charges is used in various jurisdictions, and is sometimes referred to by different names, such as:
- Customer accounting
- Self-assessed taxes
P/O Returns and Credit Notes
Reverse charges are not calculated for P/O returns and credit notes. When you post a P/O Return and P/O Credit Note for a transaction that has reverse charges, a related credit note is generated in Accounts Payable. You must manually change the Tax Amount and Reverse Charges Amount for this A/P credit note. For more information, see the Accounts Payable help.