Retention before VAT refers to an arrangement, commonly found in construction or service contracts, where the customer withholds a portion of the payment as a form of security to ensure that the contractor or supplier fulfills their obligations. The VAT treatment of retention can follow different approaches—either before or after VAT is applied—depending on the terms of the contract. This manual outlines the procedure for recording retention amounts where VAT is deferred i.e. retention is before VAT calculations.

• The retention is calculated on the net amount (before VAT).

• VAT is applied only to the amount paid or invoiced, not including the retention.

• The retained amount is usually paid at a later date once the agreed conditions are met (e.g., project completion or after a defect liability period).

a) Create an Invoice received document and apply Retention on the main page.

In the Inventory tab, enter the Price and Amount fields. Based on the entered Amount, the system will automatically calculate and apply the Retention %.

The Retention Amount will not be posted immediately. Instead, it will be reflected only when a Retention Purchasing Document is manually created.

Use the generate option, and create Retention (Purchasing)

For VAT calculation = (Amount-Retention amount) * 5%

                                     (10000-1000)*5=450

b) Create a manual INPUT VAT TRANSACTION to record the tax.

In the Main tab, complete the required fields as follows:

1.  Adjustment Type: Select Increase.
2. Basis: Link the initial Invoice Received document.
3. General G/L Transaction: This will create the accounting entry for Input VAT.
4. Increase Recoverable VAT: Use this option when the Tax Invoice is received, as it will increase the amount of recoverable VAT.

In the Inventory and Services tab, enter the VAT-related details as follows:

Enter the line item corresponding to the goods or services. The VAT amount should be manually calculated as:
((Quantity × Price) – Retention) × 5% (based on the previously calculated retention).

Once all required fields are completed, post the document.

Accounting entries generated:

a) Input VAT recording:
Dr Input VAT on purchases of Inventory
Cr Other operating income

b) Recoverable VAT recognition:
Dr Current VAT Receivable
Cr Input VAT on purchases of Inventory

c) Reversal of Other Operating income

Since this entry should affect the Trade Payable G/L instead of Other Operating Income, create the following adjustment to reclassify the balance:

1. Set the Transaction Type as Reversal.
2.  In the Income tab, enter the Credit (Cr) G/L account as Current Trade Payable and select the relevant Supplier Name.
3.  In the Other G/L Account, enter the Debit (Dr) to the same G/L account used in the original Input VAT transaction.
4.  The Amount should be AED 450, matching the original entry.

d) Payment to a supplier

To record the payment to the supplier for the VAT amount:

• Set Transaction Type to Other.
• In the Payment Details tab, select G/L account as Current Trade Payables, choose the Supplier, and enter the exact VAT amount.

e) Reversal of Retention

When the retention needs to be reversed, the VAT on that retention must be calculated using the same method as in steps b, c, and d.

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