Why is the VAT amount not 20% of the invoice total?
For churches and charities registered for VAT, this is a commonly asked question both for invoices received from suppliers and invoices created for customers.
This situation typically only occurs with some multi-line invoices, and it is typically caused by rounding.
Why can this happen with multi-line invoices?
When an invoice has multiple lines, VAT is set per invoice line and the total VAT is the sum of each of the VAT lines (rather than VAT being a percentage of the total invoice amount).
Note: This isn't unique to ExpensePlus. Other invoicing systems work like this too, which means that you may find this occurring with supplier invoices you receive that are multi-line invoices.
Rounding issues can arise when the VAT amount for each invoice line is rounded. The sum of all of the VAT amounts won't necessarily equal the amount you would expect if you simply calculated the VAT amount from the subtotal amount.
Example
In the example below, we've made each invoice line have 3p and for VAT to be 20%.
Calculating the VAT per invoice line:
20% of 3p = 0.6p (which when rounded becomes 1p)
The invoice total is calculated by summing the line amounts (in this case 3p+3p+3p=9p), and VAT.
Amount is calculated in the same way by summing the VAT line amounts (in this case 1p+1p+1p=3p).
Note: The reason that VAT is calculated per invoice line and then summed is that not all invoice lines might have the same VAT rate.
However, if you were to just consider the invoice total and VAT total amounts, you'd find that this appears to be 'wrong', because 20% of 9p = 1.8p (which when rounded becomes 2p, not 3p).
This is why, when receiving a supplier invoice, you record the invoice total and then select the VAT amount, which may be different to the VAT amount stated on the invoice (by a few pennies).
In summary:
- Invoices get created by calculating the VAT per invoice line and summing the VAT amounts to get the VAT total
- Invoices typically get recorded by just entering the total amount, and then calculating the VAT total based on the VAT amount (which doesn't necessarily get you the same amount as if you calculate VAT per invoice line!)
How to overcome the issue
When entering supplier invoices into ExpensePlus, typically you can just record the overall amount and select the VAT amount.
However, if the VAT amount doesn't quite match (because of the issue described above that can occur with multi-line invoices), then select the 'mixed' VAT rate option and manually enter the VAT amount.
Note: not all accounting packages offer this option, so if you issue a customer an invoice and they contact you to say the VAT amount is wrong then we'd recommend that you:
(a) send them this help guide article which explains why the VAT amount may appear to be incorrect but isn't actually wrong, and
(b) suggest that they enter the individual invoice lines (rather than just the total invoice amount).
By doing this, VAT will get calculated the same way as the invoice they are entering, and the VAT amount should then match the invoice total.
To better understand the VAT module, please view the module overview video here.