auto-calculate De Minimis Limit option
This option is found in Sales Order Options.
Ticking this option will automate the tracking of the value of order lines for stock or price records that are flagged as Reverse Charge VAT Applies.
After the deduction of discounts, if the net value of these goods is more than the £5000 de minimis limit, the VAT code will be changed automatically to a 'Reverse Charge Goods' type VAT rate (rate code V or any other you have created).
The option will be ticked by default.
If you select to turn this option off (untick the box) then, for each sales order, you will need to decide whether the value of Reverse Charge VAT products exceeds the £5000 de minimis limit and apply the correct VAT code.
This topic describes in more detail how the option works and what you will have to do if you decide to switch the option off. There is also a section on the Limitations of the option
Auto-calculate de minimis limit switched ON
When this option is switched on (ticked) the following functions will be invoked:
The software will track the value of order lines, for stock or price records that have been flagged as 'Reverse Charge VAT Applies'.
If, after the deduction of discounts, the net value of these goods is more than £5000 the VAT code will be changed to a Reverse Charge Goods type VAT rate (rate code V or any other you have created) automatically.
If, after the deduction of discounts, the net value of these goods is less than £5000 VAT code 1 (standard rate VAT) will be applied automatically and will operate in a traditional fashion.
If a Reverse Charge Goods type VAT rate has been applied (step 2 above), then when any of the Reverse Charge products from the order are invoiced:
The system will not apply or charge VAT, but the invoice will be annotated to advise your customer that they must account for the Output Tax on these items.
This rule will apply irrespective of whether you are invoicing the whole order or only part of the order where that part-invoice value might fall below the £5000 lienteric regard this as an accepted practice that provides a consistent approach to applying Reverse Charge VAT. However, you should ensure that your customer is also happy to trade on these terms.
When using this auto-calculate option, the de minimis rules for Reverse Charge VAT are driven by the 'Reverse Charge VAT Applies' flags on the stock and price records only.
To provide a consistent approach, any Reverse Charge Goods type VAT codes entered in analysis codes or on customer records will be ignored.
Please note: the de minimis calculation takes place when the invoice is produced. The invoice preview (available from the Sales Order detail window) will not apply the de minimus test.
Editing Orders
When editing sales orders, the same de minimis test will be applied.
If the value of the Reverse Charge products on the order is reduced to less than the £5000 limit then the order will be amended to apply VAT code 1 (standard rate VAT).
If the value of the Reverse Charge products on the order is increased to more than the £5000 limit then the order will be amended to apply a Reverse Charge Goods type VAT rate.
If the Reverse Charge products in an order have been part-invoiced (using a 'Reverse Charge Goods' type VAT rate), when the order is edited the system will recalculate the values of all the Reverse Charge order lines, both invoiced and outstanding, and re-apply the de minimis test. If the amended value of the order now falls below the de minimis value then the balance of the order will have standard VAT applied.
If a part-invoiced order is to be increased and the increase will put the order value above the de minimis limit (where before it fell below the limit) it would probably be better to enter a new order than to edit the part-invoiced order.
Processing Credit Notes
You should be very careful when producing credit notes for goods to which reverse charge VAT is applicable.
The VAT code used for these credit notes should be the same as the VAT code used on the invoice that is being credited.
This is irrespective of the value of the Credit Note which is not subject to a de minimis test.
See Credit Notes and Reverse Charge VAT for advice on how to create credit notes.
Auto-calculate de minimis limit switched OFF
When this option is switched off (unticked), no automatic tracking of values will take place. You will have to decide for yourself whether the value of Reverse Charge products on sales order exceeds the £5000 de minimis limit.
The system will look at the stock and price records entered on the sales order to see if they are flagged 'Reverse Charge VAT Applies' and suggest the use of a Reverse Charge Goods type VAT rate where appropriate.
The value of the ordered goods will not be considered.
If the stock and price records entered on the sales order are NOT flagged 'Reverse Charge VAT Applies' but the Customer record has a Reverse Charge Goods type VAT rate as a default code, then this will be pulled through to the order. This should be changed if the goods being purchased do not fall within the Reverse Charge VAT rules.
If the stock and price records entered on the sales order are NOT flagged 'Reverse Charge VAT Applies' but the Analysis code used has a Reverse Charge Goods type VAT rate as a default code, then this will be pulled through to the order. This should be changed if the goods being purchased do not fall within the Reverse Charge VAT rules.
The suggested VAT code for any order can be changed.
We understand that there are some large businesses, that trade in high volumes of the Reverse Charge goods that have decided not to apply the de minimis rule. They have chosen to do this because of the inconsistency that it can introduce to invoice values and expectations of cash flow. This is against the guidance from HMRC. Any business taking this route should recognise that HMRC may call them to account for any tax loss in the whole supply chain.
Limitations to the Auto-calculate de minimis limit option
Calculation is NOT applied to Text lines
The option only applies the de minimis value calculations to Stock and Price records. Text lines are not considered.
Do not consolidate orders containing Reverse Charge goods into a single invoice.
As the system applies the de minimis rules at order stage, we would advise against consolidating orders containing Reverse Charge goods into a single invoice. This is especially pertinent if you raise orders below the £5000 de minimis limit which you subsequently consolidate into a single invoice. Here there is a danger that the incorrect VAT treatment may be applied.
Blanket Orders
We would advise against entering blanket orders for Reverse Charge goods unless your consignments consistently exceed the £5000 de minimis limit.
In order to meet HMRC regulations you will need to input each “call off” consignment as a separate order, this will ensure that the de minimis test is applied against each consignment transaction.