Introduction
Tax is a tricky topic when converting data. Different software systems have very different approaches to tax. From calculating rounding differences differently to the way they record “late” invoices, the varied approaches make tax a challenge.
We’ll attempt to explain our overall approach and how this might affect your conversion. We try to make it clear in advance of converting that it is impossible to make an exact copy of your data in a different accounting system. Please attempt to bear this in mind throughout.
Hopefully you’ve read the limitations pages (Xero / QuickBooks Online / Sage Accounting) and are aware there are workarounds used and tasks to complete after the conversion completes.
Why are there tasks to complete after the conversion?
Tax periods and registration numbers aren’t required for converting so these will need to be entered.
In addition, you’ve probably submitted tax Returns using Sage or QuickBooks. Since you’ve been using the software until recently, it knows which transactions were included in what return and on what date that tax return was calculated and submitted. Our conversion process is unable to bring over the tax reconciled / filed status of transactions. Since tax returns have never been filed in the new system, it will assume that the date of all transactions determines the period of the tax return it should be included within. Until a tax return is filed it’s not possible to calculate “late” transactions.
Once you file your first tax return, the assumption is that all previous tax transactions have been dealt with. Any “late” transactions or amendments to transactions included in prior tax periods will correctly be recognised as such and brought into the current tax period.
Why doesn’t my tax return in my old system agree to the new system?
As mentioned above, one reason is those “late” bills, so consider this example. Once a “late” bill is entered into your old software, it knew the invoice was “late” as the return for the period the bill is dated in had already been submitted. It was therefore included in a more current return. After converting, your new software will simply take the bill date and try to include the transaction in the tax return covering that period. This timing difference will mean historical tax returns don’t agree but the overall tax liability balance will agree.
Another reason historical tax returns may differ is due to other workarounds we have to use. Particularly when dealing with EC transactions, CIS, or reverse charges, different software systems apply the tax rates very differently in order to achieve a similar result. We’re often left with a situation where it’s just not possible to enter a transaction so that it has the correct tax treatment in a return and also results in the overall correct tax liability balance. This often occurs with payments on account under the cash VAT scheme. We’ve decided that it’s more important that the financial statements accurately reflect the correct balances than the requirement to correctly complete a tax return. The reasoning here is that if the overall balance isn’t correct, the tax returns won’t be correct for long. Since the overall balance is correct, despite some initial tax returns needing adjustment, after a short while, further adjustments won’t be necessary, and the correct returns and balances will prevail.
What does this mean to me?
In short, you’ll have some work to do after the conversion is complete. You’ll need to work through the post-conversion tasks to enter tax details. Also, the first tax return (but potentially any VAT return containing converted transactions) in your new software could be incorrect. You’ll almost certainly need to refer to tax Returns, tax audit trails, and EC Reports in your old system in order to help determine the correct tax figures for the next return you file. You may need to manually submit the numbers to the tax authorities rather than using the figures provided by the software. Alternatively, you may be able to adjust the figures provided by the new software to correct them.
The good news is that once you’ve sorted any tax returns containing converted transactions in your new system, subsequent returns shouldn’t need amending in any way (assuming you’ve correctly applied tax rates in your new system).
It also means we recommend you avoid spending time trying to generate and reconcile already filed tax returns from one system to another. They’re unlikely to agree, and they’re already submitted. Instead, we suggest it’s best to focus on the returns yet to be submitted to make sure they’re correct. This may require calculating a partial tax period in your old system and a partial period in your new system and combining the two.