Chasing the penny – why different systems add up VAT differently...

For businesses providing goods or services to people, one of the most important tasks is the calculation of VAT values. This allows you to put a fitting pricing strategy into action or to reclaim the accurate amount of VAT.  A business may choose to use software which provides one of two calculating systems to add up their VAT on an invoice.

The software which uses ‘System 1’ adds 0.2% (for VAT) of the original value to each component. The new component values are then totalled to produce the Total Value.

Initial Value VAT New Value
  £1 20p £1.20
  £3 60p £3.60
  £2 40p £2.40
Total £7.20

Alternative software will use ‘System 2’ to work out the Total Value of all the components and will then add on 0.2% for VAT.

Initial Value VAT New Value
Total  £6  £1.20 £7.20

If you were only dealing with whole values, whether the software used System 1 or 2 to calculate VAT wouldn’t make a huge difference. However, this is rarely the case and when even just pennies are involved, a business can easily run into complications, causing your accounts to look out of sorts. When software calculates the 0.2% VAT value for decimal points, there will be occasions when the amount needs to be rounded up or down. This can alter the Total Value depending on the methods of the software.

Additionally, if your business sent an invoice to another and both employed software which used different systems to calculate the Total Value, there would be a strong possibility that two invoices would be produced with conflicting Total Values. This can result in unallocated cash and an obvious administrative mess!

For bigger businesses which trade in volume markets, the difference can be more substantial and extremely problematic. In the retail market especially, there are countless ‘0.99p’ deals and we have seen multiple cases where the system of VAT calculation used by a company’s software has led to a difference in Total Value by vast amounts.

Keeping accurate financial records is not just a legal requirement but it also gives you a useful indicator of your business operations and performance. This can consequently affect your Annual Accounts, Tax Returns and Credit Control.  Understanding VAT calculating software and the systems they use can make a massive difference to your business and accounts.

For advice regarding VAT calculation or if you face concerns in your business due to VAT miscalculations, email us via or call 01243 92989

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