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 tax 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:
Sales Tax (US)
Frequently asked questions about Consumption or Sales tax include:
Setting up a Consumption or Sales Tax
To set up a Consumption or Sales Tax in your forecast,
Go to your Fathom forecast
Click the ‘Cog/Gear’ icon in the lower left corner to open the ‘Forecast Settings’
At the top of the Forecast Settings menu, select the ‘Tax’ tab
In the ‘Consumption Tax’ section, click the green ‘+ Add type’ option
In the menu that opens, type in a name for the tax you’re creating
Fill out the following fields:
The Balance Sheet liability account the collected tax will be accumulating in.
The general tax rate that will be applied to the chosen P&L accounts. Different, account-specific rates can be set up later on in the tax setup. This is the tax rate that will be applied automatically if an account-specific rate is not set up.
The accounting method you are using to recognize the collected tax (Cash or Accrual).
If selected, then Fathom will pay down the entire amount in the Posting to liability account according to the payment period and tax year you specify.
💡Pro Tip: For payments that do not fit exactly within the payment period scheme, the ‘Advanced Options’ allow for more flexibility in scheduling when payments are made.
If not selected, then you can pay down the Posting to liability account through one-off or recurring journals.
Allowed: If calculated taxes are negative, then Fathom will assume that you are receiving a refund for those tax amounts. Therefore, at the end of the tax period, a refund will be issued for the negative accumulated tax amount; increasing the cash account the tax is being paid from by the same amount.
Not Allowed: If calculated taxes are negative, a refund will not be issued to the cash account the tax is being paid from. Instead, the negative balance will be carried forward to offset future positive calculated tax values.
7. Select ‘Create a new tax type’
Now activate the tax type on the appropriate P&L accounts:
Once the tax type has been created, you can select the tax and click the ‘Active on 0 accounts’ option to add the tax to P&L accounts.
From the drop down options, choose the accounts the tax should be active on. These are the accounts the tax rate will be applied to and taxes will accumulate for in the Posting to account on your Balance Sheet.
You can type in different, account-specific tax rates for each account. The account-specific rate you choose will be applied to that account and the collection of that tax will follow the rules you have set for the overall tax.
💡Pro 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, annually, bi-annually, 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.
What if different tax rates impact the same account?
Fathom allows tax rates to be set at the individual account level. If there are different consumption or sales tax rates 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
💡Pro 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 recognized as a tax liability when the product or service is recognized 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 recognized when goods have been delivered or services have been rendered. Until then, the collected consumption or sales tax is recognized 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 for the company, will determine when revenue or expenses are recognized versus received or paid out in cash. To view the impact of an account’s timing profile, you can see the ‘Cash Timing Impact’ preview.
Access this view by:
Clicking on a cell for the account
In the right side menu, scroll down to the timing profile section
Click the ‘three dot’ icon
Select ‘Preview’ from the drop down menu
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 do this,
Go to the ‘Forecast Settings’ by clicking the ‘Cog/Gear’ icon in the lower left corner of your forecast
Select ‘Tax’ up at the top of the settings
Go to the changing tax and click the ‘Three dot’ icon next to the ‘Edit’ option
From the drop down menu, choose ‘New variation’
Select the month the tax will change
Set the new rate, change the impacted account, and/or choose a new payment period
These changes will automatically be incorporated into your forecast
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:
Go to the tax in the ‘Forecast Settings’
Select the option to ‘Edit’ the tax
Choose the beginning of the tax year from the drop down menu
Select ‘Apply Changes’
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 prior to the Quarter 4 consumption tax payment.