Tax Returns Don’t Agree
Tax is a tricky topic when converting data. Different software systems have very different approaches to tax. From calculating rounding differences differently to the way they record “late” invoices, the varied approaches make tax a challenge.
We’ll attempt to explain our overall approach to tax and how this might affect your conversion. We try to make it clear in advance of converting that it is impossible to make an exact copy of your data in a different accounting system. Please attempt to bear this in mind throughout.
Why are there tasks to complete after the conversion?
Tax periods and ID’s aren’t required for converting so these will need to be entered.
In addition, you’ve probably submitted Tax Returns using Sage, Xero or QuickBooks. Since you’ve been using the software until recently, it knows which transactions were included in what Tax Return and at what date that Tax Return was calculated and filed. Our conversion process is unable to bring over the Tax reconciled/filed status of transactions. Since Tax Returns have never been finalized/filed in the new system, it will assume that the date of all transactions determines the period of the Tax Return it should be included within. Until the first GST/HST Return is finalized, it’s not possible for Xero to calculate “late” transactions.
Once you file your first Tax Return, Xero interprets this to mean that all previous taxable transactions have been dealt with. Any “late” transactions or amendments to transactions included in prior tax periods will correctly be recognized as such and brought in the current tax period.
Why doesn’t my Tax Return in my old system agree to the new system?
As mentioned above, one reason is those “late” bills so consider this example. Once a “late” bill is entered into your old software, it knew the invoice was “late” as the Return for the period the bill is dated in had already been submitted. It was therefore included in a more current Return. After converting, Xero will simply take the bill date and try to include the transaction in the Tax Return covering that period. This timing difference will mean historical Tax Returns don’t agree but the overall Tax liability balance will agree.
Another reason historical Tax Returns may differ is due to other workarounds we have to use. Particularly when dealing with transactions with unusual tax elements, different software systems apply the tax rates very differently in order to achieve a similar result. We’re often left with a situation where it’s just not possible to enter a transaction so that it has the correct Tax treatment in a Return and also results in the overall correct Tax liability balance. This often occurs with payments on account under the cash scheme. We’ve decided that it’s more important to accurately reflect the financial statements over the requirement to correctly complete a Tax Return. The reasoning here is that if the overall balance isn’t correct, the Tax Returns won’t be correct for long. Since the overall balance is correct, despite some initial Tax Returns needing adjusting, after a short while further adjustments won’t be necessary and the correct Returns and balances will prevail.
What does this mean to me?
In short, that you’ll have some work to do after the conversion completes. You’ll need to work through the post-conversion tasks to enter Tax details. Also, the first Tax/GST/HST Return (but potentially any Tax/GST/HST Return containing converted transactions) in your new software could be incorrect. You’ll almost certainly need to refer to Tax Returns, Tax audit trails and Reports in your old system in order to help determine the correct Tax figures for the next Return you file. You may need to manually file the correct numbers rather than using the figures provided by Xero. Alternatively, you may be able to adjust the figures provided by Xero to correct them.
The good news is that once you’ve sorted any Tax Returns containing converted transactions in your new system, then subsequent Returns shouldn’t need amending in any way (assuming you’ve correctly applied Tax rates in Xero).
It also means we recommend you avoid spending time trying to generate and reconcile already filed Tax Returns from your old system to Xero. They’re unlikely to agree and they’re already filed. Instead, we suggest it’s best to focus on the Tax yet to be filed to make sure it’s correct. This may require calculating a partial Tax period in your old system and a partial period in Xero and combining the two.