I am happy to announce that we added full VAT support to version 1.2.0 of the Best Farrier app. That should make the app much more useful for farriers in the many countries that use this tax system.
Keeping track of sales tax is a tedious process, especially if you conduct business over multiple state (or country) lines, and have to pay a number of different sales taxes or VATs. Fortunately, Best Farrier can help with that by keeping track of those taxes for you.
In this post I’ll go through the steps of setting up and using both VAT and the standard Sales Tax systems, and what are the main differences as far as the Best Farrier app is concerned. This is a long post, so please bear with me.
Please note that I am not going to talk about what sales taxes or VATs are, how they work from a business or consumer point of view, or if you should charge them or not. For that you need to consult your accountant. I am only going to explain how they work within the context of using Best Farrier.
There are several pieces that handle the tax systems in the app (whether you’re using sales tax or VAT):
- the main Sales Tax/Vat toggle in the app settings
- the tax definitions
- the service/product definitions
- using taxes in invoices
- the tax reports
I’ll go through all of these in detail below.
I mention “sales taxes” and “VAT” throughout this article, and by that I mean the tax definitions you create when you set up Best Farrier after you start using it. If you need help on how to manage your sales tax or VAT definitions, please read this support article.
First, what are the differences between Sales Tax and VAT as far as Best Farrier is concerned?
Sales taxes, once applied to an invoice, are calculated to any services and products included on that invoice. If you have multiple sales taxes applied to an invoice (for example, one for your state and one for your city), they are all calculated for any items they apply to, and then added to form the total tax amount.
If a sales tax applies to services, it is calculated for all services on the invoice; if it applies to products, it is calculated for all products on the invoice.
My state has a tax of 6% on both services and products, and my local town has an additional 1% on products only. When I add both to an invoice, all services and products will be taxed 6%, and then only the products will be taxed an additional 1%, and that’s the total amount of taxes for the invoice. So this is what it would look like on an invoice:
State tax: 6% on services/products
Local tax: 1% on products
Shoeing (a service): $200
Pads (a product): $15
$200.00 * 6% (state on services)
+ $15.00 * 6% (state on products)
+ $15.00 * 1% (local on products)
VATs, when applied to an invoice, are calculated based on the rate type, or bracket, that each service or product is in. Best Farrier supports 5 tax rate types: zero tax, super reduced, reduced, intermediate and standard.
When you apply a VAT to an invoice, that tax is calculated only for the services and products that fall under that VAT rate type. So, if you have a VAT defined for the reduced rate, for example, and apply it to an invoice, it is calculated only for the services or products that use reduced rate (you can configure the rate types for services and products in the Settings > Services and Products screen).
Note that if you add a service or product of a rate type (for example, reduced) but does not apply a VAT for that rate to the invoice, then no tax is charged for that service or product.
My country has a Standard VAT rate of 13% and a Reduced rate of 8% that apply to both services and products. There is also a Zero tax rate of 0% (of course) that applies only for certain products considered essential. If I apply all those taxes to an invoice, it would look like this:
Standard rate: 13% on services/products
Reduced rate: 8% on services/products
Zero rate: 0% on essential services/products
Shoeing (a service, taxed at Standard rate): 200 €
Pads (a product, taxed at Reduced rate): 15 €
Hoof supplement sold as DIY (a product, Zero tax): 25 €
Farm call (a service, taxed at Super reduced rate): 50 €
200.00 € * 13% (only applied to the service using Standard rate)
+ 15.00 € * 8% (only applied to the product using Reduced rate)
+ 25.00 € * 0% (only applied to the product with Zero tax rate*)
= 27.20 €
* the Zero tax lines, even though they are always zero, are still calculated and saved so they can be shown on the tax reports
** the super reduced line is ignored since there is no VAT for that rate applied to the invoice
When you’re using VAT, the invoices show a breakdown of the taxes paid for each rate type, showing the total taxable amount for each rate type and the total tax for that rate.
Note: If you need your invoices to show a separate Zero tax line, you need to create the tax in Settings > Sales tax and VAT and add it to invoices at creation (and possibly mark it as a default tax so it’s always included). Simply setting a service or product as zero tax/exempt will only exempt it from taxes in the calculations but won’t show as a separate line on the invoice or tax reports.
So, how do I choose between Sales Tax and VAT?
Go to Settings > App settings and find the “Use VAT as tax method” checkbox under the “Invoices and Payment Preferences” section. Leaving it blank will make the app use sales tax as its tax method, checking the box will switch it to VAT.
That checkbox has two main effects on the app’s behavior: when creating or editing an invoice, you will only see taxes of the kind matching your choice, meaning you’ll only see VATs if the box is checked, and only see sales taxes if it’s not (I’ll talk about how to create the tax definitions in a moment). The other effect is that you cannot edit invoices created under the other tax method, so if you create some invoices using sales tax, for example, and then switch over to VAT, you won’t be able to edit those invoices until you switch back.
Note that even if you do switch back and forth between tax methods, the tax reports are not affected by that setting and will report any and all taxes charged, regardless of the kind.
How do I create the taxes I need to charge?
You manage the taxes in the Settings > Sales taxes and VAT screen. That screen lists all taxes regardless whether they are sales taxes or VATs, but shows you which are which so you can tell them apart.
When creating or editing a tax definition, you use the “This is a VAT” checkbox to specify if that tax is a sales tax or a VAT. If left blank, the tax is a sales tax; if checked, it’s a VAT.
For VATs only, you will have the option to pick a VAT rate type (Standard, Intermediate, Reduced, Super reduced or Zero tax).
The rest of the information (rate, if the tax applies to services and/or products, etc.) applies whether it’s a sales tax or VAT, so fill it out according to your tax requirements.
As mentioned earlier, if you use VAT and need a separate line in the reports for Zero tax items, you’ll need to create a tax of the type “Zero tax” and (most likely) set its rate to zero. You will also probably want to set it as a “default tax” so it gets included automatically on new invoices.
How do I set up my services and products to work with VAT?
If you are using VAT, you may need to configure your services and products to use the correct VAT rate type. By default, all services and products will use Standard rate VATs if they are included in the invoice.
If you provide a service or product that qualifies for a different rate, just go to the Settings > Services and products screen and edit any service or product you need to change. When the app is set to use VAT, there will be an option to select between the different VAT rate types. Once set to a specific rate type, only VATs of that rate type will be applied to that service or product, so remember to create the appropriate tax for that rate type as described above, and apply it to invoices as needed (or set it as a default tax so it always gets applied).
Applying taxes to invoices
When you first create an invoice, the app automatically applies all taxes (Sales taxes or VATs, according to the “Use VAT as tax method” setting we talked about earlier) that are set as a “default tax” (marked with a on the tax list screen) to that invoice.
You can edit the list of taxes applied before saving to add or remove any taxes as needed for that particular invoice (for example if you’re doing work in another state that has its own sales taxes). You can also edit the invoice later and change the taxes applied to it if there was anything missing or wrong, but remember, you can only edit invoices that use the same tax system currently set as the one the app is using (for example, if you created an invoice using sales taxes and later switched to VAT in the settings, you can’t edit that invoice unless you switch back).
Once the invoice is finalized and saved, the calculated taxes will be included in the tax reports.
How does my tax method choice affect the tax reports?
Best Farrier provides a Sales tax summary report for your accounting and sales tax payments purposes, that can use either cash accounting or accrual basis as calculation method.
The “Use VAT as tax method” setting doesn’t affect the calculations per se, and the report will list any and all taxes collected, independently of the setting. So if you have for any reason collected both sales taxes and VAT throughout a reported period, all of those taxes are going to be listed on the reports.
There is one important detail for those using VAT as their tax method: if you need the reports to list the non-taxable amounts under Zero tax rate, you must create a Zero tax definition and apply it to invoices, as mentioned earlier. Otherwise, any services or products marked as tax exempt will simply not have taxes applied to them, but those non-taxable amounts will not be listed on the reports.
And that’s it!
After you followed all the steps above, you should be all set up and ready to use either sales taxes or VATs. Congratulations!
You can search our support section for more information about using the app, but also feel free to contact us with any questions you might have about how Best Farrier can help your recordkeeping. You can also subscribe now and start your free trial, if you’re not already a subscriber.
Farrier and Owner