How Tax is handled in Sage Financials

How Tax is handled in Sage Financials

Tax handling in Sage Financials has been designed for the global market – so it can be configured to work in any country in the world. And a single Sage Financials instance can use multi-legislation for different companies based in different countries. This flexibility means there is a degree of complexity you might not find in other accounting systems.

This article will explain how Tax is defined in Sage Financials, how you can configure these settings as ‘defaults’. It will be followed by another article on Tax Breakdown, VAT handling and how to choose the correct Tax Treatment.

Three Tax Objects:

This diagram summarises how the three Tax Objects link together with the Legislation.

Top of the pile is Legislation. In a multi-company environment the Legislation is dictated by the current company, otherwise its just your primary Legislation. The Legislation determines which Tax Treatments and Tax Codes are available to use. The actual Tax Rate used comes by combining Tax Treatment and Tax Code.
For example:

Tax Treatment Tax Code Tax Rate
UK Sale Goods Standard Rate UK 20%
Reduced Rate UK 5%
Exempt UK 0%
Zero Rate UK 0%
EC Sale Goods UK Standard Rate UK 0%
Reduced Rate UK 0%
Exempt UK 0%
Zero Rate UK 0%


The importance of UIDs

Although the objects are linked as Lookup fields, Sage Financials uses the UIDs to work out the Tax Rate to apply. The UID for Tax Rate MUST be made up from [Legislation UID].[Tax Treatement UID].[Tax Code UID].[Identifier]
For example:
Legislation UID: GB
Tax Treatment UID: Output_GB
Tax Code UID: StandardGB
Tax Rate UID: GB.Output_GB.StandardGB.VAT

Alpha Index have a tool to auto-generate the Tax Rate UID and validate existing UID’s.

Tax Rate Dimension

In addition to the objects described above, there is a Tax Rate Dimension. The Tax Rate Dimension Tag can be linked to the Tax Rate object, but in many cases it is not. What Sage Financials uses is the Name of the Dimension Tag which must match the UID of the Tax Rate.

The Tax Rate Dimension Tag has a Ledger Account defined which is used by the Posting Rules to determine where to post the Tax Amount (eg to ’2201 Purchase Tax Control Account’). The Posting Rules use ‘[TaxRate]’ which picks up the appropriate Tax Rate Dimension Tag from the Tax Treatment & Tax Code, rather than an actual Dimension Tag linked to the transaction. The Tax Rate Dimension Tag also has a Tag Ledger Account ‘LedgerAccount’ but this is not currently used in the UK posting rules.

Entering Invoices and how ‘defaults’ work


Entering an Invoice

In a multi-company environment you first select the Company you are working on. This will determine the Legislation, which will limit the Tax Treatment you can use in the transaction Header:

  • If the Transaction has a ‘Default Tax Treatment’, this will be displayed when you create a new transaction.
  • If you choose a Customer/Supplier setup with a default Tax Treatment setup, this will be used instead.
  • But you can then change the Tax Treatment if necessary.

When you enter new Line Items:

  • If the transaction has a ‘Default Tax Code’ this will be displayed.
  • If you choose a Product with a default Tax Code setup, this will be used instead.
  • But you can then change the Tax Code if necessary.
  • The Tax Treatment defaults to the Header Tax Treatment, but can be overwritten on a line -by-line basis

Strategy for using defaults

There are various ways of achieving the correct tax coding, but the defaults allow you to setup your tax in a way to minimise data entry. For these examples, I am assuming you are based in the UK, but the same principal should work in any country:

If you have two Customers, one in the UK and one in Germany you can setup their default Tax Treatments as follows:

  • UK Customer: UK Sale Goods
  • DE Customer: EC Sale Goods UK

With your Products you can setup the default Tax Code as follows:
Widget: Standard Rate UK
Printed Material: Zero Rate UK

Using the examples from the Tax Treatement-Tax Code-Tax Rate in the table at the start of this article, the DE Customer would not be charged VAT for Widgets, but the UK Customer would, simply using the defaults!

If you sold to a registered UK Charity, you would have to overwrite the Tax Code with ‘Exempt’, but there could be an argument for creating another Tax Treatment ‘UK Charity Exempt’ so defaults worked in this case as well, but this is something for Sage to implement.

This all gets a lot more complicated with Purchases from the EU, and will be covered in the next article.

For details on how to setup these default Tax Treatment & Tax Code, see this article in Sage Customer Community or this one

Word of caution

You should NEVER change Tax Treatment or Tax Codes without advice from help of Sage directly. The ‘Compliance Engine’ which calculates the VAT has Tax Rates hard coded into the algorithm. This means unexpected Tax Rate UID’s will NOT be processed correctly.

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