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This feature is included with What is a consumption tax?
Consumption or Sales taxes can be used in a forecast when a tax needs to be collected on top of the amount listed on the P&L. The tax collected as cash is offset by a liability account on the Balance Sheet. These types of taxes are likely to be applied to Revenue, Cost of Sales, and Expense accounts because they are often associated with purchases of products and/or services.
Some common types of consumption tax include:
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💡Smart Tip: Learn how a consumption tax impacts your forecast from our video.
Common questions about Consumption or Sales tax include:
How to set up a Consumption or Sales Tax
To set up a Consumption or Sales Tax in your forecast:
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💡Smart Tip: The ‘Posting to’ liability account will automatically be paid down by your default cash account. If you want the amount to be paid from a different account, then you can select the option to ‘Edit’ the tax and choose a different ‘Paid from’ account.
How a Consumption Tax impacts your forecast
For a Consumption or Sales tax in Fathom, the tax percentage rate increases the cash collected or paid out (if an expense) by that rate. The cash collected for paying the consumption tax is a liability until the tax is paid. Therefore, the Tax Liability account, or the posting to account, increases by the same amount as the collected tax.
The Tax Liability account will increase month over month as tax is collected as Cash. Journals can be used to pay down this amount, or payments can be automated according to a monthly, quarterly, yearly, bi-yearly, or bi-monthly basis.
Example: A forecast with $10,000 in Sales Revenue in a month has a 10% Consumption or Sales tax applied to that revenue account, meaning that $1,000 in sales or consumption tax is collected in addition to the revenue collected.
In the forecast, $10,000 is listed in the Revenue account on the Profit & Loss.
On the Balance Sheet, the Cash amount increases by the $10,000 in Revenue and by an additional $1,000 for the Consumption or Sales tax collected. The $1,000 increase in Cash from the collected tax is offset by a $1,000 increase in the tax liability account.
For a quarterly payment scheme, the tax amount will accrue in the Cash and Tax Liability accounts each month until the end of the quarter. At this point, the entire amount in the Tax Liability account will be paid down by the matching collected Cash amount.
Common Questions
What if different tax rates impact the same account?
Fathom allows tax rates to be set at the individual account level. If different consumption or sales tax rates are impacting the same account, then we recommend using a working effective rate (WER) or, if impacting a new revenue account, a blended rate as the tax rate for that account.
Working Effective Rate (WER)= (Average monthly sales tax collected in account / Average monthly revenue in account) |
Blended Rate Example: If 25% of the sales for an account are expected to have a 16% consumption or sales tax applied and 75% of the sales for the account are expected to have a consumption or sales tax rate of 25%, then a blended tax rate of 22.75% would be used.
(16 x 25%) + (25 x 75%) = 22.75
💡Smart Tip: Fathom allows up to two decimal places to be entered for a tax rate.
Why is my sales tax being included in my prepayments or unearned revenue?
Consumption or Sales tax is recognised as a tax liability when the product or service is recognised as an expense or revenue on the Profit & Loss. If your company is using the accrual method of accounting, then expenses or revenue are only recognised when goods have been delivered or services have been rendered. Until then, the collected consumption or sales tax is recognised as a Prepayment or Unearned Revenue.
Example: A company has paid £100 for goods that have not yet been received. Along with the £100 for the goods, there is a 20% consumption or sales tax. In total, the company has paid £120 in cash for the goods (£100 for the goods themselves and £20 in tax).
On the Balance Sheet, £120 would be listed in Prepayments as the £20 is not considered a tax liability until the expense is incurred or the goods have been received.
The timing profile set for an account, along with the accounting method used by the company, determines when revenue or expenses are recognised versus when they are received or paid out in cash.
To view the impact of an account’s timing profile, you can see the ‘Cash Timing Impact’ preview.
To access the Cash Timing Impact preview:
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What if the tax rate, payment period, or impacted accounts change?
If the tax rate, payment period, or taxed accounts change, then you can add a New Variation of a tax into your forecast.
To create a new tax variation:
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What if my tax year does not line up with my financial year?
When you create a new tax type in Fathom, you have the option to select the beginning of the tax year for that tax type.
If you have already created a tax and need to change the tax year for it:
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What if I am taking part in a deferral scheme for my consumption tax?
If the Consumption or Sales tax payment for a period has been deferred, then the deferred amount can be added back via a journal in the tax liability account.
Example: The Consumption tax for a company is typically due quarterly. However, a recent government deferral scheme allows the company to defer the payment of this year’s Quarter 3 consumption tax until Quarter 4. To account for this deferral, the tax would remain set up according to the automatic quarterly payment scheme, and a journal entry would be made.
The month that Quarter 3’s consumption taxes were paid, the automatic payment would occur with the Tax Liability account being paid down by the matching Cash amount. Using a journal, you would add back the Tax Liability and Cash amounts in the same month. At the end of Quarter 4, the entire Tax Liability amount would then be paid down by the matching cash amount. Journals could also be used to pay down the amount before the Quarter 4 consumption tax payment.
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