Post by SXGuy » Sat Aug 06, 2011 4:37 pm

I have lost track of the amount of times i have had to tell people how to calculate vat/tax correctly, so im hoping by writing this topic, it will either be taken notice of, or get stickied for future reference.

Depending on how it goes, i may continue to add to the topic with more detailed explanations of the vat/tax process and reasons behind it, such as, calculating vat aquisitions from other EU member states, or the differences in vat rates dependant on the item of purchase etc.

For reference, a price exlcuding vat/tax is called "Net Price"
a price Including vat/tax is called "Gross Price"

do not confuse this, with income over expenditure as these phrases mean something else.

But for now, i will explain how to calculate the correct amount of vat/tax on a product, whether you have the price before vat/tax or the price including vat/tax.

Most people assume that if you have a price including vat/tax you can simply subtract the vat/tax percentage off the total price and this will give you the price exlcuding vat/tax. This is incorrect

To be able to calculate the correct amount of vat, already included in a price, you must take the vat percentage, and work out its decimal (or fractional) representitive.

For example, if vat was 20% the decimal version would be 1.20 (20 / 100 + 1)
19% = 1.19 (19 /100 + 1)

And so on.

Now for example say vat is set at 20%. and your GROSS price was £10. to work out what the price excluding vat would be (for the purpose of inputing the correct product price in opencart)

You would do this £10 (GROSS) / 1.20(VAT) = £8.33333 (NET PRICE)

So therefore if the Net price is 8.3333 and the Gross is 10. we can conclude that the amount of vat, would be £1.66666667 (or rather £1.67)

For adding vat/tax to the Net product price, you can simply just ADD the percentage of vat to the Net Price.

£8.33 + 20% = £9.9996 (Rounded up to £10)

Thats the first lesson in calculating VAT, depending on the response i get, i will go in to more detail about other areas of VAT/TAX that you may need to know when dealing with other EU Member states, or even world wide.

Please take note of the methods i mention above as if you fail to, you will calculate the wrong amount of VAT on your Sales, and when you submit your Vat return, or make a claim of VAT, you will be UNDER Charging the customer, and OVER paying your Goverments VAT Department. And please, do not think for one moment VAT departments care if you OVER pay them, and will write you a nice letter with a cheque, this does NOT happen. They will only ever point out to you, if you have UNDER paid. So be wise, be careful, claim, and charge the CORRECT vat amounts, always.

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Post by welfordmedia » Sat Aug 06, 2011 6:22 pm

SXGuy, great post. I have recently had talks about the knowledge of some people when it comes to tax calculations. There is really only one way to do it but most poeple don't get that (This was nothing to do with Open Cart)

It is important to point out too that when you are working tax don't round the number until the very end.

EG:
A piece of paper costs £0.01 net
Gross is £0.012
Qty ordered 10,000

Maths: ((Net * Tax) * Qty) then round this to 2 decimal places
Net cost: £100.00, Gross cost: £120.00

The common mistake is to:
(rounded(net * tax)) * qty
This will mean the £0.012 gross price will be rounded back to £0.01 before its multiplied - WRONG! You will be losing the 20% tax you are meant to be charging on top of the net!

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Post by teratyke » Sat Aug 06, 2011 7:00 pm

And if you are confused about what VAT is and if it applies to you ring the HMRC.
In the UK, the VAT threshold is currently £73,000 (Aug 2011). If your turnover (see an accountant, but in simple terms the money you collect through sales) is over this amount you will almost certainly have to become VAT registered and charge VAT on your sales. You can register voluntarily for VAT at any time.

See http://www.hmrc.gov.uk/vat/start/regist ... gister.htm

If you are not VAT registered you must not make a charge for VAT (your prices can be the same as a VAT registered business, but you cannot pretend you are collecting VAT).

Registering for VAT is a big deal the first time, well it was for me. Its a lot of extra work. However, if you ring the HMRC and pester them, even with silly questions they will help you. Just don't try to hide anything.

The best thing about being registered for VAT is that it means you are more attractive to other businesses and of course you can reclaim the VAT you pay on your purchases - but the novelty doesn't last long. ;D

p.s. Great explanation sxguy thanks.

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Post by SXGuy » Sat Aug 06, 2011 7:41 pm

Thanks for your comments guys, that was some good addition to this topic, that was needed.

I should note that some businesses require you to be vat registered regardless of your turnover threshold, however im not sure if anyone here would be running a business via opencart that fits in to that bracket, but all info is on HMRC.

As i said in my first post, there is a need to clarify what people do when running an online shop in 1 EU Country and selling to another. Alot of people are unsure of which vat rates apply, and how they handle vat on goods bought from another EU country for resale in their own.

So i will write up a little peice on what to do in this aspect shortly.

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Post by teratyke » Sat Aug 06, 2011 8:01 pm

One thing I still have to think about/check on every time it comes up is reverse charge VAT, it affects your turnover (in fact even though its an expense it adds to your sales) and may have an impact on when you need to register. It has to be accounted for. Very common if you are using Google Ads, eBay etc... Some of the regulations changed earlier this year, I think. I'm not confident enough on this to advise others, but I suspect its a problem quite a lot of people don't know they have. Perhaps that would be a good point to cover?

Personally I would find your EU-EU guide very useful. Never hurts to revisit these things to make sure everything is still correct!

Thanks

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Post by SXGuy » Sat Aug 06, 2011 11:05 pm

you can check details regarding reverse charging of VAT at the link here http://www.hmrc.gov.uk/vat/managing/int ... orting.htm

I get what you mean about even though its an expense it adds to your sales, but this is then reconciled back in the section of the vat return relating to imports or rather aquisitions as far as i understand it.

In the most simplest terms.

If you are in the UK, and you buy something from Holland, providing the supplier is aware you are vat registered, then he/she should sell you the goods supplied at 0%.

At this point, when you claim the expense, you should include vat at the rate of your own country (uk being 20%).

Most Vat accounting packages will tell you, that this vat allocation should be marked in some way, software specific, so it knows that it is an aquisition of goods, and not a normal purchase.

This vat amount will then be included, in the amount of vat reclaimed on purchases, and is offset also, in the section for aquisitions from other EU States.

So in short, although you add 20% vat from the goods you bought, it is zero'd out again on the vat return side.

The only reason its done this way is purely to keep track of the vat you claim from goods abroad, no other reason, it doesnt affect your vat payable in any way, except the usual way of offsetting the vat you charge on sales.

This is all easy enough to do when working with accounting packages, but can become quite tricky to remember when you are manually keeping track of vat on sales and purchases.

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Post by teratyke » Fri Oct 28, 2011 4:38 am

Hi SXGuy
I can't figure this out and the advice from the HMRC is, well not vague, but open to interpretation (or maybe its just beyond my understanding. http://www.hmrc.gov.uk/vat/managing/cha ... ts-etc.htm (I don't understand if I fit into money off coupons, or multi-buy offers, or something else).

I'm selling standard rate goods.
Lets say I want to sell two items at £10 inc.vat

example ignoring VAT
item 1 £10
item 2 £10
discount (for buying 2 items) -£2
free shipping
Total = £18

My question is does that discount need to need to consider VAT, or is there vat on the discount itself?

My two options are (I've used 4dp for clarity)

option 1
item 1 £8.3333
item 2 £8.3333
discount -£2 (no vat on this line there is no vat on the discount)
VAT (20%) £3.3334
Total £18

option 2
item 1 £8.3333
item 2 £8.3333
discount -£1.6667 (-vat on the discount, i.e. the discount is a vat item)
VAT (20%) £3.007
Total £18

The end result is the same, but which is correct?

Advice appreciated.
Thanks
Rob
Last edited by teratyke on Fri Oct 28, 2011 6:05 am, edited 1 time in total.

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Post by SXGuy » Fri Oct 28, 2011 5:00 am

You make a good point and im glad you brought it up. I can see how people can get confused.

From HMRC
If any of your goods or services are discounted, you must charge VAT on the discounted price rather than the full price
The two you listed do indeed total the same, however there are fundemental mistakes in both examples.

Option 1 implys that vat is 1.6667, which on 8.3333 would be true, however you have applied a discount, so the vat amount would be reflected by the subtoal after discounts were applied.

Option 2 is also incorrect, because you do not apply discounts based on vat, vat is only calculated on the subtotal (i.e after discounts have been applied)

The correct method is as follows

item 1 £8.3333
item 2 £8.3333
discount -£2
subtotal £14.6666
vat £2.93332
Total £17.59992 (£17.60)

If you look at my method, you will see, that vat is calculated based on the subtotal after discounts have been applied. Which is the correct method. (its up to you if you wish to charge a discount based on the amount of vat that would have been payable on item 1 if no discount were applied, and this would make the final total £18, however there are no vat charges per say, on discounts)

item 1 £8.3333
item 2 £8.3333
discount -£1.667
subtotal £14.9996
vat £2.99992
Total £17.99952 (£18.00)

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Post by teratyke » Fri Oct 28, 2011 6:03 am

Thank you! I need to work this through on paper and in opencart (I do like to -Really Understand- and for me that is pen and paper), to try to recreate the same. I'll look at at it fresh tomorrow.

I appreciate the answer. Thanks.

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Post by SXGuy » Fri Oct 28, 2011 2:55 pm

no problems, all you need to remember is, discounts are applied before vat is calculated, so thats on the base product price, and you wont go wrong. Glad i could help.

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Post by georghill » Thu Feb 23, 2012 1:25 am

Great thread, thanks SXGuy. I have another kind VAT/TAX related problem.

In my country the general VAT rate is 23%, which means that for a product selling for 123 euros (gross), I write 100 euros (net)in the product admin. Now if I want to send a 10 euros (gross) coupon for my client I'll create a 8.1301 euros (net) coupon in coupon admin. This seem to give correct calculation and the prices and coupon discounts are in gross terms what my client expects.

The problem is that we also have certain products I should sell with special 9% VAT, so I have both 23% and 9% items in my shop. Now how should I register the coupon code? Thinking the coupon as a "product" it should always be treated to include 23% VAT. I am rather confused about how to configure my coupons.. I have not figured out how Opencart actually calculates VAT in a multi-rate environment.

At the moment opencart seems to always select the lowest tax rate to calculate the coupon with.
I think coupons should be like shipping costs and configurable as belonging to certain TAX class.

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Post by SXGuy » Thu Feb 23, 2012 1:47 am

You raise a good point.

Ok firstly, check your local goverment legislation concerning coupons.

I think you are getting confused with the sale of a coupon, and the use of one to reduce costs at checkout.

When you sell a coupon, you can add tax of 23% to it.
When a coupon is used to redeem money off a product, tax has already been added to the sale of the original coupon.

This means that the coupon should only reduce the net total price, before tax is calculated on the final checkout total.

It doesnt matter if the product total is based on 9% or 23% or any percentage.

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Post by georghill » Thu Feb 23, 2012 2:32 am

Yes, you are right I mixed up gift vouchers and coupons. Vouchers work just fine they are no included in the tax calculation. What I am refering are the coupons (which don't "send" to customers like I wrote, thanks for noticing me).

Otherwise my problem remains, I think. It seems to me that with coupons opencart does reduce the VAT amount which would be calculated if there were no discount coupons in effect. And it seems to me that I am forced in admin area to give a net value to the coupon, other wise I seem not the get the proper gross value to the discount.

For example, if I used a gross value 10 euros for a 23% product with a price of 100 euros, my customer expects to get 10 euros off from a gross price of 123 euros so she/he should get the product for 113 euros. In my current setup I add 5 euros (gross) shipping so the final total should be 118 euros (gross).

This I can get only if I configure the discount coupon as 8.031 euros. Then the vat included in the purchase is 22.07
euros (without the coupon is were 23 euros.) This is what I mean the opencart reduces the normal vat amount when customer includes a coupon.

If I used plain 10 euros for the coupon value I will get a gross total of 115.70, which in my world seems wrong.

So adding coupon values in net terms works fine with one vat rate shop, but not when I have variable rates in my cart, because when creating the coupon I cannot know which rate opencart will apply to my coupon at purchase time.

I still think I should be able to fix the rate when creating coupons, because opencart does some tax calculation also to the coupon. And yes, it is not about the rates per se, but about having the same rate in the configured coupon and in the shopping cart.

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Post by georghill » Thu Feb 23, 2012 2:59 am

To my previous post: This may be a cultural question in what is "correct" and what is "not correct". If customers always thought in terms of net values there may not be any problems, but there seem to be when thinking from the gross values back to net values...

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Post by SXGuy » Thu Feb 23, 2012 3:59 am

I understand your query, to be honest, im from a country where discounts are not considered to include tax because tax is only applied to the net total. So it may be hard for me to give you an answer.

In the UK, discounts are considered money off the net price, tax is only ever calculated on the net sub total.

For accounting purposes, gross turnover is amount less tax less discounts. Which is why it works that way here.

Perhaps someone else from your own country can help.

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Post by georghill » Thu Feb 23, 2012 6:43 am

Thanks and sorry if I side-tracked your thread. I think I will just tweak the code to my liking here. Should not be too difficult, I hope.

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Post by SXGuy » Thu Feb 23, 2012 5:16 pm

Just please before you do anything, check your goverment legislation, because i am 99% sure, you are not suposed to charge tax on discounts, nor is it supose to reduce tax on goods.

If i paid 123 for something and 23 of it was tax, and my discount took off 10, then my goverment would wonder why tax is only 13 on 100 instead of 23.

However, if my 10 reduced 100, to 90, and tax was charged on that, my goverment would be happy because the correct amount of tax was charged to the net total.

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Post by georghill » Mon Feb 27, 2012 1:27 am

Yes, absolutely as you write, thanks! What I mean is I will try to make the code acknowledge at purchase time the possible tax rate variation, maybe like this:

I will make a discount offer in gross terms (fixed value), and then when the system figures out the totals from a certain cart the code would look first what tax rates there are are in the cart. If there is only one rate, the code calculates the net value of the discount and uses that value as it does now, reduces it from the sub-total. I if there should be two tax rates in effect in the cart the code would calculate two net values in the ratio of the rates, and does again what it always does.

This just that I can present discounts in gross terms and still the system calculates in a normal way the discounts from the subtotal before tax calculation. So I am not actually charging tax from the discounts per se, but only handling ratios between two or more tax rates in a situation when I present the discounts in gross terms to my customers. End result is that taxes are calculated from the discounted prices only. I hope I am thinking this right...

EDIT:
Let's try this with an example:

Say I have two product:
1. one that has net price 50e and tax rate 9%, so its gross price is 54.50e
2. other that has net price 100e and tax rate 23%, so its gross price is 123e

with taxes the gross total will be 177.50e with tax amounts 4.50e (9%) and 23e (23%)

Now I if tell my customers, they will get, say, 12 euro discount from the displayed gross total, it results 165.50e as payable value. No taxes involved here.

With only on rate this is easy to set up in opencart, I simply write the net amount of the discount in admin tools and I get the right result, But with two effective rates as in above I will have to calculate like this:

The price ration in the above example between the different tax-rated product is 1/2, so from the 12e I assign 4e for the 1st product and 8e for the 2nd. But to get this right in opencart system I will have to take these two discount values as net values, so I calculate 4 less 9% = 3.669725e net discount fro the 1st product and 8 less 23% = 6.504065e for the 2nd product.

If I now substract 50e - 3.669725e and 100e - 6.504065e and add taxes it results to exactly the same result 165.50e
as in the gross value example. And taxes are still calculated only for the product, Discounts are not taxed on their own. In the example above I am calculation taxes from the discounts because I start with gross values that I want to present to my customers.

The issue with opencart is that I can only give one net discount amount to the system. This works fine out of the box if I have only one tax rate and can publish the gross discount value and enter a net discount value in the system. But with variable tax rates between products I have to do some calculation my self.

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Post by Morganf » Tue Nov 03, 2020 4:17 pm

Even though the original post was written 11 years ago, I found it really useful. I've never been good at mathematics, and found removing VAT from a Gross figure confusing, so based on what I read here and in the hope that it could be of some use to someone else, I created a personal project to calculate VAT. I'm going to improve it over time, so any feedback would be appreciated.

It's written in JavaScript (React), here's the basis of the calculation:

Code: Select all

  const [amount, setAmount] = useState('0');
  const [vatRate, setVatRate] = useState('20');
  const getPercentage = Number(vatRate) / 100;
  const correctPercentage = 1 + getPercentage;
  const amountIncludingVat = Number(amount) * correctPercentage;
  const amountExcludingVat = Number(amount) / correctPercentage;
Here's the site: https://calculators.icu/online-vat-calculator

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Post by CiaranMoran » Tue Jul 05, 2022 4:37 pm

If you're looking for a quick and easy way to calculate VAT, then https://myvatcalculator.co.uk/ is definitely the site for you! Just enter in the amount of money you want to calculate VAT for, and our calculator will do the rest. It's really that simple!

And if you're looking for more information on how VAT works and how to calculate it correctly, then check out our helpful blog articles. We've got everything covered, from the basics of calculation to more advanced topics like partial exemption and taxable turnover. So whether you're a VAT beginner or a seasoned pro, we've got you covered!

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