Managing VAT Surcharges on Invoices

This tutorial will walk you through one possible approach to configuring CATS to generate VAT tax entries as part of the invoicing process.

Setting up VAT Codes

CATS configurable nature gives a high level of control over the behavior and appearance of the VAT tax charges. Configuring CATS for the VAT tax is a straightforward process that involves creating the general ledger account, the tax entry, and a cost code entry. Full tracking of VAT charges through the accounting system is accomplished by using these three codes.

note

If you do business in regions with varied VAT tax structures, you can set up individual GL accounts for each VAT tax system.

Alternatively, you can set up individual cost codes for each VAT tax and accumulate the taxes all in a single GL.

VAT General Ledger Account

The VAT general ledger account serves as a collecting point for all charges related to the VAT. This GL balance will appear on your financial reporting and be tied to all charges relating to the VAT tax itself.

To create the VAT tax ledger entry, go to Accounting > G/L Maintenance > G/L Add Account.

An example GL account set up to capture VAT charges.

CATS will store all VAT charges posted on sale and purchase invoices against this GL account.

VAT Cost Code

Once the ledger account has been created, the next step is to enter a Cost Code for the VAT tax. This cost code will enable tracking of individual postings separate from the ledger account.

An example cost code entry set up for VAT charges.

VAT Tax Code

With the cost code now in place, the next step in configuring the VAT is to create a Tax code entry. The tax code allows you to specify the tax rate and currency as well as the related cost code for each tax entry. This entry will be used in the invoice template to automatically apply VAT to sale invoices.

An example tax code set up for a Euro-zone VAT tax

Once you’ve created the tax code, return to the VAT cost code and enter the new tax code in the “Tax” field.

tip

The "Tax" field and the "Cost Code" relate to each other. When entering the Cost Code, you will need to leave this field blank and return once the Tax Code has been created.

Setting up VAT Surcharge

Invoice templates provide a mechanism to automatically apply VAT (and other surcharges) to sale invoices when they are created.

note

This functionality is useful for VAT, but it can be used for any surcharge, discounts, taxes or other automatic invoice calculation.

Creating an Invoice Template for Automatic VAT Calculations

Invoice templates support the creation of automatic invoice line items. These line items will be created with the new invoice when the template is selected. To use this functionality for VAT, we need only create an invoice template with automatic line items for the VAT tax.

An "EUROVAT" invoice template with the invoice item templates defined for VAT tax.

In the screenshot, the details of this invoice template have been set consistent with the application of the Euro-zone VAT tax.

The “Invoice item templates” describes the items that CATS will add automatically when the invoice is created. There are two lines defined, with the vertical bar character working as a separator for configuration details.

The first is a subtotal:

Subtotal|V|Invoice Subtotal||||PrintEmpty;Totals=A

1. Type (“Subtotal”): this tells CATS that this line item should be treated as a subtotal (for display purposes on the printed invoice)
2. Order (“V”): the default positioning places the subtotal towards the bottom of the list
3. Label (“Invoice Subtotal”): the label to be displayed on the item and printed invoice
4. [skipped]: the Cost Code/GL#/Currency fields are not applicable for subtotals
5. Meta (“PrintEmpty;Totals=A”): these control the behavior of the subtotal entry. In this case the subtotal will always print (even if there are no items to total) and it will sum up only the amount (and not the weight or units).

The second is the VAT tax calculation:

Item|Z|European VAT|789|78900|EUR

1. Type (“Item”): this tells CATS that this is a posting line item on the invoice
2. Order (“Z”): the default positioning will place the VAT calculation at the bottom of the item list
3. Label (“European VAT”): the label to display for this item
4. Cost Code (“789”): the cost code to post with
5. GL# (“78900”): the general ledger number to post with
6. Currency (“EUR”): the default currency for this item

note

The invoice template system makes it easier to generate VAT compliant invoices. However, all of this functionality could be accomplished without using the template system. Users could generate the subtotal and VAT line items manually on the invoice.

With some inventory selected, the resulting invoice will look like this:

The body of a printed invoice showing two inventory items and a VAT calculation.

The VAT calculation is made automatically using the total value of the preceding invoice items. The rate and description are pulled in automatically from the the cost code and tax code and are stored on the invoice. If the rate should change, a single change to the tax code entry will apply to all invoices going forward. The rate can also be adjusted and items excluded from the calculation on the individual invoice.

In this case, the CATS is using a rate of 8.5% to calculate the VAT tax to be applied on this sale invoice.

When the invoice in the demonstration is posted, the following ledger entries are generated automatically.

A print-out of the ledger impact of the posted invoice.

The calculated VAT amount is accumulated into the general ledger account for VAT and Accounts Receivable and Cost of Goods Sold are adjusted in the standard way.

Reporting for VAT

The VAT general ledger account will be present on all the standard financial reporting.

Ledger reporting can filter by cost code or gl# to get detailed information.

Additionally, the Inventory Transaction report ties the VAT charges to the invoices and their corresponding physical material.