VAT Posting Setup and How VAT Entries Work in Business Central
- 6 dni temu
- 8 minut(y) czytania
VAT is one of the first things that confuses new BC consultants — and for good reason. It touches almost every purchase and sales transaction, it has its own separate ledger, and it requires dedicated setup before a single invoice can be posted correctly.
In this article we will cover everything a beginner needs to know: the two VAT posting groups, the VAT Posting Setup matrix, how BC calculates and posts VAT on purchase and sales documents, the VAT Entries ledger, and the most common setup mistakes.
Part 1 — Key concepts before you start
What is VAT in BC's context?
VAT (Value Added Tax) is a consumption tax applied at each stage of the supply chain. In Business Central, you deal with VAT in two directions:
• tax you pay to vendors on purchases — recoverable from the government: Input VAT (Purchase VAT)
• tax you charge customers on sales — payable to the government: Output VAT (Sales VAT)
BC does not know your country's VAT rates automatically. You configure every rate, every account, and every rule yourself through the VAT Posting Setup.
The two dimensions of VAT — the core idea
Every transaction in BC needs two VAT posting groups to determine how VAT is calculated:
Group | Comes from | Represents |
VAT Bus. Posting Group | Vendor or Customer card | Who you are trading with — domestic, EU, export, etc. |
VAT Prod. Posting Group | Item, G/L Account, or Resource card | What you are buying or selling — standard rate, reduced, exempt, etc. |
BC looks up the combination of these two groups in the VAT Posting Setup matrix to find the VAT rate and the accounts to post to. This is exactly the same logic as the General Posting Setup covered in the previous article — two groups, one matrix.
NOTE: If you are already comfortable with how General Posting Setup works (Gen. Bus. Posting Group + Gen. Prod. Posting Group → matrix), VAT Posting Setup works identically. Two groups, one lookup table. |
Part 2 — Setting up VAT Posting Groups
VAT Business Posting Groups
Navigate to: VAT Business Posting Groups. Create one group per type of trading partner:
Code (example) | Meaning |
DOMESTIC | Vendors and customers in the same country — standard VAT rules apply |
EU | EU business partners (B2B) — often subject to reverse charge rules |
EXPORT | Non-EU customers — sales are typically zero-rated |
Assign the VAT Bus. Posting Group on the Vendor Card and the Customer Card — the same place you assign the Gen. Bus. Posting Group.
VAT Product Posting Groups
Navigate to: VAT Product Posting Groups. Create one group per tax category:
Code (example) | Meaning |
STANDARD | Full VAT rate — e.g. 23% in Poland, 20% in UK, 19% in Germany |
REDUCED | Reduced rate — e.g. 8% or 5% for certain food, books, or medicines |
EXEMPT | Zero-rated or VAT-exempt goods and services |
Assign the VAT Prod. Posting Group on the Item Card, the G/L Account Card, and the Resource Card — the same place you assign the Gen. Prod. Posting Group.
Part 3 — The VAT Posting Setup matrix
Navigate to: VAT Posting Setup. This table is the heart of VAT configuration in BC. For every combination of VAT Bus. Posting Group + VAT Prod. Posting Group you define:
Field | What it controls |
VAT Calculation Type | How BC calculates the tax amount — see options below |
VAT % | The tax rate applied to the base amount |
Sales VAT Account | G/L account where output VAT is posted (a liability — you owe this to the government) |
Purchase VAT Account | G/L account where input VAT is posted (a recoverable asset — the government owes this to you) |
Reverse Chg. VAT Acc. | Used for EU B2B reverse charge — the buyer accounts for the VAT instead of the seller |
Tax Liable | If unchecked, BC skips VAT calculation for this combination entirely |
VAT Calculation Types
The most important field in the setup — choose the wrong type and VAT will post incorrectly:
Calculation Type | When to use it |
Normal VAT | Standard domestic transactions — seller charges VAT, buyer pays it |
Reverse Charge VAT | EU B2B purchases — the buyer self-accounts for VAT (both input and output) |
Full VAT | The entire document amount IS the VAT — used for import VAT invoices |
No Taxable VAT | No VAT applies — used for exempt transactions (creates no VAT entry) |
NOTE: The combination matrix means you can have completely different VAT treatment for the same item depending on who you sell it to. For example: DOMESTIC + STANDARD = 23%, but EU + STANDARD = 0% with reverse charge. The item does not change — only the customer group does. |
Part 4 — How BC posts VAT on a Purchase Invoice
Example setup
Setting | Value |
Vendor VAT Bus. Posting Group | DOMESTIC |
Item VAT Prod. Posting Group | STANDARD |
VAT % (from VAT Posting Setup) | 23% |
Invoice net amount | 100 |
G/L entries created after posting
Account | Debit | Credit |
Cost / Inventory Account (P&L or Balance Sheet) | 100 |
|
Purchase VAT Account (Balance Sheet — asset) | 23 |
|
Vendor Payables Account (Balance Sheet — liability) |
| 123 |
The total amount the vendor expects to receive is 123 (net 100 + VAT 23). The vendor payable always reflects the gross amount.
NOTE: The Purchase VAT Account is a balance sheet ASSET account — it represents money the government owes back to your company. It will be cleared (reduced to zero) when you submit and settle your VAT return. It is not a cost. |
Where to find the VAT Entry
After posting, navigate to the Posted Purchase Invoice → Navigate → VAT Entries. You will see one VAT Entry with:
• Type = Purchase
• VAT Bus. Posting Group = DOMESTIC
• VAT Prod. Posting Group = STANDARD
• Base = 100 (the net amount)
• Amount = 23 (the tax amount)
• Closed = No (it has not yet been included in a settled VAT return)
Part 5 — How BC posts VAT on a Sales Invoice
Example setup
Setting | Value |
Customer VAT Bus. Posting Group | DOMESTIC |
Item VAT Prod. Posting Group | STANDARD |
VAT % (from VAT Posting Setup) | 23% |
Invoice net amount | 150 |
G/L entries created after posting
Account | Debit | Credit |
Customer Receivables (Balance Sheet — asset) | 184.50 |
|
Sales Revenue Account (P&L) |
| 150 |
Sales VAT Account (Balance Sheet — liability) |
| 34.50 |
The customer will pay 184.50 in total (net 150 + VAT 34.50). The customer receivable always reflects the gross amount.
NOTE: The Sales VAT Account is a balance sheet LIABILITY account — it represents tax you collected on behalf of the government that must be paid over. It is not your revenue. Revenue is only the 150 net amount on the Sales Revenue Account. |
Part 6 — The VAT Entries ledger
Every time BC posts a transaction that involves VAT, it creates a VAT Entry in addition to the G/L entries. VAT Entries are stored in a completely separate ledger from the General Ledger.
How to find VAT Entries
Three ways to navigate to VAT Entries:
1. From any posted document → Navigate action → VAT Entries
2. From the G/L Entry related to the VAT account → right-click → VAT Entries
3. Search for 'VAT Entries' in the Tell Me search bar
Key fields in a VAT Entry
Field | What it means |
Type | Purchase or Sale — which side of the transaction this is |
Base | The net (ex-VAT) amount that VAT was calculated on |
Amount | The VAT amount itself |
VAT Bus. Posting Group | Which business group was used for this entry |
VAT Prod. Posting Group | Which product group was used for this entry |
Closed | Yes = this entry has been included in a settled VAT return; No = still open |
Document No. | Links back to the original posted document |
NOTE: The VAT return in BC is calculated from VAT Entries, NOT directly from G/L account balances. This is why the two accounts — Sales VAT Account and Purchase VAT Account — must match the VAT Entry amounts. If they do not reconcile, it usually means a manual journal was posted directly to the VAT G/L account without going through the VAT entry process. |
Why VAT Entries matter
There are two practical reasons to understand VAT Entries as a beginner:
• When you run the VAT Statement (the report BC uses to prepare your VAT return), it reads from VAT Entries — not from G/L balances. An incorrect VAT Posting Setup creates wrong entries that produce an incorrect return.
• When you investigate a posting error or a reconciliation difference, VAT Entries are the diagnostic tool. You can filter by period, by document, or by posting group to find exactly which transaction caused the discrepancy.
Part 7 — The 'Prices Including VAT' flag
One setting that trips up many beginners is the Prices Including VAT checkbox on sales and purchase document headers.
Setting | Amount you enter | How BC interprets it |
Prices Excl. VAT (default) | 100 | 100 is the net amount → VAT is calculated on top → total = 123 |
Prices Incl. VAT | 123 | 123 is the gross amount → BC extracts VAT from inside → net = 100, VAT = 23 |
The end result is the same — 100 net and 23 VAT. The difference is only in how you enter prices on the line.
NOTE: If you see unexpected VAT amounts on a document, always check the 'Prices Including VAT' flag on the header first. This is the most common reason why VAT looks wrong when the setup itself is correct. |
Part 8 — VAT Statement and VAT Settlement (overview)
Once you have accumulated VAT Entries over a period, BC provides two tools to close the period:
VAT Statement
Navigate to: VAT Statement. This is a configurable report template that maps rows of VAT Entries (filtered by VAT Bus. Group, VAT Prod. Group, and Type) into the numbered boxes of your country's official VAT return. Each country has its own format.
You run the VAT Statement at the end of each VAT period to see your output VAT (liability), input VAT (recoverable), and the net amount to pay or claim.
Calc. and Post VAT Settlement
Navigate to: Calc. and Post VAT Settlement. This batch job:
1. Marks all open VAT Entries in the period as Closed = Yes
2. Posts a G/L journal that moves the balance from the Sales VAT Account and Purchase VAT Account to a VAT Settlement Account
3. The remaining balance on the VAT Settlement Account represents the net VAT amount payable to (or receivable from) the government
Part 9 — Common setup mistakes for beginners
Error or symptom | Likely cause |
'VAT Posting Setup does not exist' | Missing row in VAT Posting Setup for this VAT Bus. + VAT Prod. combination — add the missing row |
VAT is not calculated on an invoice line | VAT Prod. Posting Group is missing on the item card or G/L account card |
Wrong VAT rate applied | VAT % set incorrectly in the VAT Posting Setup for this combination — check the matrix row |
VAT Entry shows Amount = 0 | VAT Calculation Type is set to 'No Taxable VAT' — change to 'Normal VAT' if this is a taxable transaction |
VAT amount looks wrong but setup seems correct | Check the 'Prices Including VAT' flag on the document header — the amount may be interpreted as gross, not net |
G/L balance on VAT account differs from VAT Entries | A manual G/L journal was posted directly to the VAT account, bypassing VAT Entry creation — avoid this |
Summary
Here is the complete VAT flow in Business Central at a glance:
Step | Purchase side | Sales side |
Setup | VAT Bus. Group on vendor + VAT Prod. Group on item → VAT Posting Setup row | VAT Bus. Group on customer + VAT Prod. Group on item → VAT Posting Setup row |
On posting | Debit: cost + Purchase VAT Account; Credit: Vendor Payables (gross) | Debit: Customer Receivables (gross); Credit: revenue + Sales VAT Account |
VAT Entry | Type = Purchase, Base = net, Amount = VAT, Closed = No | Type = Sale, Base = net, Amount = VAT, Closed = No |
Period end | VAT Statement report, then Calc. and Post VAT Settlement to close entries | Same — both sides settled together in one batch |
In the next article, we will look at the big picture of posting groups — how the vendor, customer, item, general, and VAT posting groups all connect into a single posting chain every time a document is posted.
Thanks for reading!
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