Enabling explicit tax adjustment on any given customer will cause Billingbooth to re-calculate the tax of all invoice charges during the billing run, to avoid tax amount rounding problems.
The problem
Every time a pending charge is created, Billingbooth stores a ledger entry against the customer, with the full value and tax amount of that entry. If a customer's tax rate is not zero, then Billingbooth will work out what the tax implication of that charge is, and store it as part of the ledger entry.
To illustrate, if we apply a charge of £3.99 against a customer, and that customer's tax rate is 20%, then the resulting tax should be £0.798 - an impractical figure given that the lowest possible denomination if £0.01 in real terms. With this aim, Billingbooth and pretty much every other accountancy system out there will round off that tax implication to £0.80. In real terms, there is a fraction of a penny difference, which in the real world can generally be ignored. When this charge gets invoiced, the tax subtotal will come to £0.80.
In situations whereby you have 100 charges, each one with a quantity of 1, and an amount of £3.99, the loss of the fraction of a penny becomes a bigger problem, as the invoice amount is £3.99 x 100 = £399.00, and the tax subtotal then becomes £0.80 x 100 = £80. However, the invoice amount's tax subtotal should be £3.99 x 100 = £399.00 x 20% = £79.80. This leaves you with a gap of £0.20 between what's on the invoice and what the real tax subtotal should be.
The solution
By going to a customer's Edit Details page, you can enable Explicit Tax Adjustment. This will cause Billingbooth to re-calculate all individual ledger entry taxes without using any rounding. The invoice's tax subtotal will then be a closer approximation of the outstanding tax implication of the invoice.
The pros
- The tax accuracy, from your customer's perspective, will be more accurate in scenarios where lots of different charges are included in the same invoice, with a potential VAT implication that requires rounding.
The cons
- When exporting your invoice information to third party accountancy systems such as Sage, Xero, Kashflow, etc. you're likely to find that the figures in the customer's invoice will slightly differ to the data exported out, due to external systems requiring individual tax calculations.
- Some Billingbooth reports may not tally up with the invoice's tax subtotal
We recommend to not use this feature on customer invoices unless absolutely necessary.