VAT Recoverability

Another key component that you must put in place are the rules that determine whether input or purchase VAT can be recovered, and if so, how much.

Whether the VAT paid on any given purchase is recoverable depends on two factors: the nature of the purchased goods or services and how the purchased goods or services are to be used. In some countries, you cannot fully recover the VAT paid for specific items, regardless of how they are used. For example, in the United Kingdom (UK), you are unable to recover input VAT incurred on business entertainment expenses, regardless of the taxable status of your business activities. You can achieve this functionality within PeopleSoft VAT defaults setup by defining inventory items and expense types that are not 100 percent recoverable.

If goods or services are used in a taxable activity (for example, an activity that ultimately results in the production of a taxable product), then VAT paid on the purchase of those goods or services is recoverable. But if the goods or services are used in a nontaxable or exempt activity (for example, an activity that ultimately results in the production of a nontaxable product), then the VAT paid on the purchase of those goods or services is not recoverable. Sometimes, purchased goods or services are used in a mixture of taxable and exempt activity. In this case, the VAT paid on the purchase of those goods or services would be partially recoverable.

In Canada, certain public service organizations, categorized as public service body types, are eligible to reclaim an additional portion of their input VAT that would normally be nonrecoverable. This eligibility is called a rebate. Each Canadian VAT authority has established its own set of rebate percentages by public service body type to be used in the calculation of VAT rebates.

Two ways that you define the usage portion of recoverability are the VAT use type and VAT apportionment.

VAT Use Type

The VAT use type identifies the end use of a given purchase by defining how much of a given activity or use is taxable, and how much of that activity is exempt, based on the tax status of the goods or services ultimately produced from those procured. In general, you specify the use type for each transaction line, thereby indicating how the purchased good or service on that line is used.

You can specify the ratio of taxable activity to nontaxable activity directly on the use type, or you can specify that mixed apportionment be used to define the ratio of taxable to nontaxable activity at the ChartField level, if you are required to calculate recoverability at a detailed level.

The VAT use type must also be linked to a public service body type for public service type organizations in Canada to retrieve the appropriate rebate percentage for transactions with exempt activity.

VAT Apportionment

VAT apportionment is based on the idea that the usage of a given good or service can be determined based on the business unit or the ChartFields to which the purchase or expense is charged. In other words, usage can be determined based on which business unit, department, or project might be using the purchased item.

You do not need to set up VAT apportionment information unless you are required to calculate your recoverable VAT at a very detailed level. If you elect to use VAT apportionment to calculate recoverability, you first determine a priority 1 ChartField and a priority 2 ChartField to be used in determining recoverability (for example, department or project). You can choose to define the ratio of taxable to nontaxable activity only at the business unit level. VAT apportionment information defined at the business unit level can be overridden by information defined at the more detailed ChartField level. When defining VAT information for either the priority 1 or priority 2 ChartField, you specify the ratio of taxable activity to nontaxable activity for any given ChartField value (or portion of a ChartField value—for example, all department IDs that begin with 10).

When a VAT use type that indicates VAT apportionment is specified for a line, the system looks for a match in the VAT apportionment data for the value specified first in the priority 1 ChartField and, if not found, then second in the priority 2 ChartField. If a match is still not found, the system looks for a match in the business unit. If a match is found, the system uses the ratio of taxable to exempt activity defined for that ChartField or business unit value to calculate the recovery and rebate. However, if no match is found, the system treats the line as 100 percent nonrecoverable. For this reason, it is imperative that you specify enough VAT apportionment data so that a match is always found.

The system uses either the transaction business unit, the transaction's general ledger business unit, or the distribution line general ledger business unit to access VAT apportionment information, based on the type of business unit that you define as the VAT apportionment control for the PeopleSoft Payables, Purchasing, General Ledger, Expenses, and Treasury business unit VAT drivers in the common VAT defaults table.

Calculating Recovery and Rebate

In addition to the rebate rates defined for public service bodies (PSB) and any recovery rate that may have been defined for the individual item or expense, the system uses the percentages defined for taxable and exempt activity to calculate the recovery and rebate percentages that are then used to calculate the recoverable and rebate VAT in the following way:

  • VAT recovery percent is calculated as [(item recovery percent/100) × (taxable activity/100)] × 100

  • VAT recovery amount is then calculated as gross VAT amount × (VAT recovery percent ÷ 100)

  • VAT rebate percent is calculated as [(item recovery percent/100) × (exempt activity percent/100)] × PSB type rebate rate

  • VAT rebate amount is then calculated as gross VAT amount × (VAT rebate percent ÷ 100)

For example, for a school in Ontario, Canada, the rebate rate is 68 percent. If the school incurred input VAT in the amount of 250.00 CAD for an item defined as recoverable at 50 percent and it was associated with a VAT use type with a taxable activity percent of 75 percent, then the result would be:

VAT recovery percent = 
((50/100) x (75/100)) x 100 = (.5 x .75) x100 = 37.5 = 37.5%
VAT recovery amount = 250.00 x (37.5/100) = 250.00 x .375 = 93.75
VAT rebate percent = ((50/100) x (25/100)) x 68 = (.5 x .25) x 68 = 8.5 = 8.5%
VAT rebate amount = 250.00 x (8.5/100) = 250.00 x .085 = 21.25

(When you calculate the VAT rebate amount, the rebate percentage is applied against the gross VAT amount, rather than the nonrecoverable VAT amount, because the exempt activity percentage was taken into account when you originally calculated the rebate percentage.)

This example involves calculating the PSB type rebate rate with a VAT code that is made up of multiple VAT authorities, each with its own individual rebate rate. In this example, the rebate rate is calculated as the sum of (VAT authority rebate rate × VAT authority tax rate) for each VAT authority within the VAT Code divided by the sum of (VAT authority tax rate) for each VAT authority within the VAT Code. (VAT authority rebate rate × VAT authority tax rate) for each VAT authority within the VAT Code) ÷ (sum (VAT authority tax rate) for each VAT authority within the VAT Code).

For a school in New Brunswick, Canada, the PSB rebate rate would be calculated as:

 ((68 x 7) + (0 x 8)) / (7 + 8) = 476 / 15 = 31.73