Non-deductible VAT feature in Business Central

Non-deductible VAT feature in Business Central – newly introduced feature in D365 Business Central.

Introduction

With the 2023 release wave 1 of Microsoft Dynamics 365 Business Central – and further rollout in wave 2 – Microsoft introduced a powerful new functionality in D365 Business Central: Non-deductible VAT.

This feature is now available across all countries/regions using the W1 base app, apart from Belgium, Italy, Norway, and Spain. It provides a structured way for organisations to manage VAT that cannot be reclaimed under local tax regulations. Businesses can now better comply with regional VAT requirements by configuring partial or full non-deductibility rules within their ERP system, ensuring both accuracy and transparency in tax reporting.

• Nondeductible value-added tax (VAT) is the VAT that’s payable by a purchaser but that isn’t deductible from the purchaser’s own VAT liability. Companies can usually recover VAT on the purchase of goods and services that are related to their business activities. However, in some situations, a business incurs VAT that isn’t deductible. These situations are typically related to the local regulations and can differ among countries/regions.

In general, VAT can’t be deducted for some purchases because of the following factors:

• The type of goods or services that are purchased – VAT is fully or partially nondeductible according to the law about goods such as cars, mobile phones, and food purchased at restaurants.
• Partially deductible pro-rated VAT – VAT is pro-rated according to the ratio between the sales operations that VAT is owed for and all performed operations. VAT that exceeds this ratio can’t be deducted.

Setting up to use non-deductible VAT

Non-deductible VAT is included in the base application but isn’t enabled by default. To use this feature, you must enable it on the VAT Setup page.

VAT Setup page

After enabling the feature, configure VAT posting group combinations for use as non-deductible VAT. Enable them and add a percentage for deduction.

If needed, you can fine-tune the settings for better results. You can choose to configure the impact of non-deductible VAT on the item cost, fixed asset acquisition cost, or job cost.  You can also configure how to treat non-deductible amounts. If you want these amounts to be posted only in General Ledger entries but use them as an additional cost in purchase, you can add it in the setup.

• DEV Logic We added all the non-deductible VAT logic and events to the Non-Deductible VAT Management codeunit. If you need to get the non-deductible VAT percentage not just from the VAT posting setup, use the OnBeforeGetNonDeductibleVATPctForPurchLine integration event and return the Non-Deductible VAT % based on the purchase line.

 Reporting non-deductible VAT

After posting, the VAT Entry table shows separate details for deductible and non-deductible amounts and bases. When it’s time to report VAT amounts to your authorities, the Amount Type column in the VAT Statements view offers options for non-deductible and full amount or base. The Day Book VAT Entry report features new columns as well. Other reports will be updated in later releases based on our customers’ feedback.

NOTE: After you enable non-deductible VAT, you can’t turn it off, because the feature might include changes to data and might initiate an upgrade of some database tables. Microsoft strongly recommends that you first enable and test this feature in the sandbox environment before you enable it in the production environment.

Conclusion

The newly introduced Non-deductible VAT feature in Business Central enhances VAT handling capabilities by allowing businesses to configure and manage non-recoverable VAT according to their local compliance needs. From setup to reporting, the feature is designed to integrate seamlessly into existing processes—provided it is tested in a sandbox environment first.

As Microsoft continues to refine this functionality based on user feedback, organisations can look forward to even greater flexibility and accuracy in VAT accounting across regions.

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