Create and use 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 and purchase quotes
  • Sales and purchase orders
  • Expense claims
  • Journal entries

Tax amounts calculated from tax codes are posted to the account selected when defining a specific tax code, regardless of whether they are debits or credits. This account must be added to your chart of accounts before a tax code is used.

A tax code account offsets taxes collected or received under its tax code(s) against taxes paid under the same tax code(s), 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 liability balance will be the difference between VAT collected and VAT paid. When she remits that amount to her tax authority, applying the same tax code on the payment, the 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 liability balance will reflect only sales tax collected until he remits that amount to his tax authority, dropping his tax liability 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.

Setting up tax liability accounts

Tax liability accounts can be set up before or after adding tax codes. But it is normally faster to set them up first so tax codes can be added in a single step.

Go to Settings and click Chart of Accounts:

On the balance sheet side, click New Account:

Define the account:

  • Give the account a Name. In this example, the name is Tax payable.
  • Enter a Code, if desired, to match an overall scheme for the chart of accounts.
  • Assign the account to a Group. Normally, tax accounts are placed in the Liabilities group, because more tax will be payable to the tax authority than is recoverable from the authority. (When a tax is not offsetting, this will always be true.) If, under unusual circumstances, you expect to always be paid a recoverable tax by the authority instead of remitting tax, classify the tax code under Assets.
  • Leave the Tax Code field with the default, No tax entry.

Click Create. If you will be separating different tax codes into different balance sheet accounts, repeat the process above as many times as necessary.

Prior to Manager version 19.11.85, a built-in account named Tax payable was activated automatically when tax codes were used. All tax codes posted to this account by default. Much greater flexibility is achieved by defining your own tax liability account(s).

For businesses already established when version 19.11.85 was released, the built-in Tax payable account was converted automatically to a standard account, defined as in the example above. No action is required by the user for the conversion.

Adding a tax code

You can add as many tax codes as you need to use. At a basic level, Manager allows two types of tax codes:

  • Business localization tax codes, which are predefined for specific countries or regions
  • Custom tax codes, which you define yourself

Business localization tax codes

Localization settings and features, including predefined tax codes, are available in the program for some locations. These are always preferable if they meet your needs. Generally, predefined tax codes exist only when localization options include a report transformation that calls data for specific tax codes. Unless the tax code is predefined, the report transformation cannot find necessary data.

In many cases, more than one tax rate or type is available for a country. To activate localization tax codes for your location(s), follow instructions in this Guide.

When the tax codes are first imported, they will be assigned to the Suspense account by default. On the Tax Codes page of the Settings tab, click Edit for all tax codes and assign each one to the desired tax liability account.

If a localization tax code is for a 0% rate, that is, if it is required by local law only to show that no tax is being levied, no tax liability account assignment will be possible.

Once tax codes are activated, they remain available even if localization options for other countries are imported. This way, tax codes can be added from more than one country.

Sample Manufacturing Company operates in Australia. It follows instructions for installing the GST Calculation Worksheet. That installation includes several tax codes. Clicking Edit for the GST 10% tax code, Sample sees the tax code is set up as a single rate, 10% tax that changes the title of every sales invoice on which it is applied to Tax Invoice. Sample selects the Tax payable account it previously established following instructions above and clicks Update:

Custom tax codes

If your country or the specific tax type and rate you need are not available through the localization feature, you will need to create one or more 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, then Tax Codes, and click New Tax Code:

Define the tax code:

  • Enter a Name for the custom tax code.

  • Under Tax rate, choose one of three rate options in the dropdown box. 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. The tax amount will be included in the subtotal rather than showing below the subtotal as an amount to be added. The entire tax amount will post to the designated tax liability account. 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:

    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. On completed transactions, your tax components will be shown separately.

  • Select the Account from those tax liability accounts already created. For single-rate codes, only one account can be selected. For multiple rate codes, different accounts can be selected for each component.

Click Create to save the tax code.

Roger’s consulting services are subject to sales tax from several jurisdictions. But all are remitted to a central tax authority. So he creates a single Tax payable liability account and a custom tax code with multiple rates:

Roger applies the custom sales tax on a sales invoice for a day of services. Each tax component is separately listed:

Taxes from custom tax codes you create are not included in figures computed by tax calculation worksheets in the Reports tab. Only predefined 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 self-created tax codes when filing information with your tax authority.

Applying tax codes to line items

Tax codes are applied to individual line items on transaction forms. Every line item can have a unique tax code according to its taxability under local law. If any tax code has been defined, the Tax field appears to the right of the Amount field on the form:

Tax amounts are not shown for individual line items, but tax codes are when there is more than one. If there is only one line item, its tax code is not shown on the completed transaction. Regardless of whether tax codes are shown per line item, total tax amounts are shown for each tax code in the Totals section of the form:

An additional feature is available for receipts, payments and journal entries to support reporting of taxable events by customer or supplier in jurisdictions where that is required. This is a Customer/Supplier field where the tax can be designated to apply to a specific customer or supplier, as the case may be. The field appears after a tax code has been selected, but only when a customer or supplier is not identified elsewhere on the form. If a customer or supplier is selected as the payer or payee, the field is not available because it is unnecessary. For example, on a journal entry, if a tax code is selected for any line, the Customer/Supplier dropdown field appears:

Wherever the Customer/Supplier field appears, the list includes both customers and suppliers. This is because receipts could come from either customers or suppliers, and payments could be made to either. (Think of refunds.)

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’s name. 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 your tax liability account 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.

Custom titles

Some jurisdictions require different titles on transaction forms including tax, such as Tax Invoice instead of Invoice. You can enter custom titles for sales invoices and credit notes by checking appropriate boxes when defining a tax code. The default titles show in grey:

Editing tax codes

Once a tax code has been added, it can be edited. In the Settings tab, go to Tax Codes:

Click Edit beside the tax code you want to change. Modify the tax code definition and click Update.

Editing a tax code will retroactively change every prior transaction that used that code, as well as future transactions. Consider carefully before editing a code.

Inactivating tax codes

When a tax code is no longer valid, such as when a rate increases, you cannot delete it if it has ever been used. Nor should you change it because, as described above, that will change every transaction that has ever used it. Instead, make it inactive by checking the box:

Be sure to click Update. If the tax code comes back into use, simply uncheck the box and click Update.

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