Create tax codes

Tax codes are used by Manager to calculate and record taxes invoiced, collected, paid, and owed. They can be used for sales taxes, goods and services taxes, value added taxes, and other taxes imposed by a country or regional tax authority. They are applied (separately and distinctly, if necessary) to individual line items on:

  • Sales and purchase invoices
  • Payments and receipts
  • Debit and credit notes
  • Sales quotes
  • Purchase and sales orders
  • Expense claims
  • Journal entries

Tax amounts calculated from tax codes are posted to the Tax payable liability account, which activates automatically in your chart of accounts when a tax code is created. Tax payable is a control account, keeping separate track of each tax code used, even though all are aggregated on the Balance Sheet.

The Tax payable account offsets taxes collected or received under a tax code against taxes paid under the same tax code, regardless of transaction type. Whether taxes are collected from customers, paid to suppliers, refunded by or remitted to tax authorities, they all post to the same account and offset one another. This has important ramifications for how tax codes are applied on forms. The determining principles are whether and how the particular transaction affects the amount you owe to a tax authority.

Example 1
Johanna charges and collects VAT from customers on architectural design services. For tax filing, VAT she collects from customers is offset by VAT she pays to her suppliers. So she must use the same VAT tax code on sales and purchase invoices. Johanna’s Tax payable balance will be the difference between VAT collected and VAT paid. When she remits that amount to her tax authority, the Tax payable balance will drop to zero.

Example 2
Roberto collects sales tax from customers at his coffee shop. But local law does not permit him to offset sales tax he pays to suppliers. (In some jurisdictions, Roberto would not be assessed sales tax by his suppliers on items he will resell.) Roberto should apply the sales tax code on receipts and sales invoices. But when he purchases taxable supplies, he should include sales tax paid to his suppliers in the price of the supplies and apply no tax code on purchase invoices or payments. His Tax payable balance will reflect only sales tax collected until he remits that amount to his tax authority, dropping his Tax payable balance to zero. Sales tax he pays to suppliers will be included as an expense in the cost of supplies, reducing net income. But it will not reduce the amount he must remit to his tax authority.

On some transaction forms, an option is available as to whether amounts are tax-inclusive or tax-exclusive:

When tax-inclusive, Manager calculates effective prices that, when combined with tax at the specified rate, equal the amount entered. In other words, the tax amount is effectively backed out of the total. When tax-exclusive, Manager applies the tax rate to the entered amount and adds the resulting tax to obtain a higher total.

Adding a tax code

You can add as many tax codes as you need to use. In the Settings tab, click Tax Codes:

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Click New Tax Code. Two options exist:

  • In-built tax codes
  • Custom tax codes

In-built tax codes

Manager includes more than 270 in-built codes. These are always preferable if they meet your needs. In many cases, more than one tax rate or type is available for a country. Select a code relevant to your country and business operations:

No other steps are necessary. Repeat the process if you need to use more codes. If your country or the specific tax type and rate you need are not on the list, you will need to create one or more custom tax codes.

Custom tax codes

Manager provides a generic framework for creating simple or complex tax codes to handle almost any tax scenario. To set up a custom tax code, go to the Settings tab, click New Tax Code, then New custom tax code. Enter a name for the custom tax code. Three rate options are available in the dropdown box that appears:

  • Choose 0% to create a tax code for tax exempt transactions where it may be necessary to show the tax-exempt status. No tax will be calculated, but forms will show the 0% rate is being applied.
  • Choose 100% to create a tax code for line items that are all tax. A common application is when a tax authority sends a bill for tax due on imported goods; the tax is paid to the tax authority instead of the supplier who sold you the goods. Forms will show the tax amount as a regular line item rather than an addition to the subtotal. The entire amount will post to Tax payable.
  • For most custom tax codes, select Custom. If the custom tax code includes only one component, select Single rate in the next dropdown box that appears and enter the custom rate:

By default, all tax amounts are posted to the Tax payable liability account. Posting elsewhere requires creation of custom tax payable accounts and is discussed in another Guide.

If the custom tax code includes more than one component, select Multiple rates and enter each tax component on its own line. Use the Add line button to add additional components. If your tax code contains components subject to compounding, enter the compounded rate into applicable Tax rate fields.

Click Create to save the tax code. On sales invoices, your tax components will be shown separately:

Taxes from custom tax codes are not included in figures computed by tax calculation worksheets in the Reports tab. Only in-built tax codes associated with the country for which a worksheet was developed are taken into account. Therefore, if you create any custom tax codes and want to use one of the tax calculation worksheets, you must manually adjust values from the worksheet for all taxes collected or paid under all custom tax codes when filing information with your tax authority.

Flat rate tax schemes

Some jurisdictions use what are known as flat rate schemes, usually to simplify record-keeping and tax filing. Such schemes free a business from the need to record and offset taxes paid against those collected. Under such schemes, a standard tax rate is applied on sales, but a lower rate is remitted to the tax authority. This lower rate is calculated on the total amount for a line item, including standard tax. The difference is kept by the business as additional income. Often, flat tax rates vary by business type and size, based on assumptions of average tax paid to suppliers by businesses with certain characteristics. So they must be set up as custom tax codes in Manager.

To add a flat rate tax code, follow the same procedure as for any other single-rate custom tax code. (Flat rate schemes cannot be used with multi-component tax codes.) Name the tax code as you want customers to see it, normally with the standard tax rate. Check the Flat rate box and enter the lower rate you will pay to the tax authority:

Customers will see the standard tax rate on sales invoices, and Accounts receivable will show the full amount as being due. But Tax payable will show a lesser amount. The difference will be added to the income account where the particular line item on the sales invoice is posted.

When operating under a flat rate tax scheme, no tax code should be applied on purchases, because tax paid cannot be used to offset tax owed. Unit prices of purchased items should include tax paid. In the case of purchased inventory items, tax paid will be included in average cost, just as if it were a shipping charge or other cost of purchasing the item.

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