Hi,
I just received withholding tax certificates from one of my clients for a service I provided way before I began to use Manager. How do I credit the withholding tax account in manager?
Presumably you included this in your Starting Balances?
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No i didn’t
Then see this Guide: Enter starting balances | Manager.
Thanks for the guide. But going through the process the withholding tax under chart of accounts has no option to input a starting balance
Well, I just learned something. Pre-start-date sales invoices are treated as expected as far as determining the Accounts receivable balance on the start date for a customer. But they do not post withholding amounts to Withholding tax receivable. I had not encountered this situation before, so I did not realize you could not set a starting balance for either of the two asset accounts associated with withholding tax.
Here is how I would handle the situation. Begin by remembering that both automatic accounts, Withholding tax receivable and Withholding tax are temporary repositories for money held on your behalf by others. The first records what your customers have held back to pay to the government. The second records what customers have paid to the government so it can be applied (by the tax authority) when you file your taxes.
You bypassed use of Withholding tax receivable because you were not yet using Manager. Now, the certificates show that the government has the money. But you have no asset balance to draw upon when recording your tax filing transactions for these specific sales invoices. So when you file taxes, claim the amount already paid on your tax form, as documented by the certificates, but make no entry in Manager referencing them. If, by that time, you have created other sales invoices with withholding tax, use a journal entry as described in the Guide, Using Withholding tax to pay tax bill, to credit the Withholding tax account.
At that point, you will have zero balances in both automatic withholding tax accounts (neglecting other sales invoices after the reporting period).
You might wonder how ignoring transactions could be acceptable accounting. These are my thoughts:
- The withholding is not associated with sales invoices recorded after your Manager start date.
- The Withholding tax receivable and Withholding tax accounts are only conveniences to begin with.
- You have never held any of the money involved. Your customer initially held it, and the government now does.
- Your payment of whatever tax you owe after the certificates are applied will only record payment of the balance of tax due. Even if all your withholding tax certificates were for sales invoices after your start date, you still would not record paying the withheld money to the government. You would only record transferring the asset from Withholding tax to an expense or equity account.
I would be interested to get @Abeiku’s ideas about this. He is a moderator from a country that uses withholding tax and has more experience than I do on this subject.
Thanks for your feedback. I have a annual corporate income tax of about 2000 which I have use about 900 of the withholding tax certificate to offset at the tax authority. Now the issues is if if go through the withholding tax to pay tax bill guide by crediting the withholding tax and debiting the CIT liability account I end up with a negative amount on my withholding tax.
NB: I have sales invoices with withholding tax deductions.
@Timms, how did you do this? If your total tax due is 2000 and you have 900 in available certificates, you should only enter a payment of 1100. The rest of your bill is satisfied with the certificates, because the government already has that money. I suspect your negative balance in Withholding tax resulted because you transferred the entire amount of tax due to the government rather than only the amount for sales invoices handled through Manager.
It is not clear exactly what you did. What you should have done is use a journal entry to credit Withholding tax for amounts that have been handled entirely through Manager. You should not include the amounts on certificates for sales invoices prior to your start date. It is not clear from information you have shared which account should be debited on this journal entry. I doubt it would be any liability account, but do not know what your CIT liability account is used for or how its balance is built up. As explained in the Guide, https://www.manager.io/guides/12346, and as I wrote earlier, you would normally debit either a tax expense account or an equity account, depending on your organizational structure.
@Tut I think the problem here is about the inability to enter withholding tax receivable starting balances. Withholding taxes are just like any other asset.
I recommend you edit the invoice related to that tax credit. Gross that invoice up with the withholding tax receivable amount (enter the WHT amount only if the invoice was paid off before moving to Manager). Your starting receivable balance from that customer will go up by that amount. This is OK because withholding tax is truly a customer receivable until you receive a tax credit certificate. Use a journal entry to transfer the balance into the Withholding tax account upon receipt of the certificate or into the tax account upon realisation (tax filing).
If your financial statements are already with the tax people, you will need to show a prior year adjustment to reflect the changes to your starting balance in your next financial statements.
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@Abeiku, the problem I see with what you suggest is that you cannot manually post line items to either of the automatic withholding tax accounts. Only the program can do that by checking the withholding tax option. And the program ignores the withholding tax for pre-start-date sales invoices.
So how are you proposing that you would gross up the pre-start-date sales invoice? And are you suggesting you would just carry the added receivable until you got the certificates and then zero the invoice out with a journal entry? I’m not quite following you.
Guide me through this. Have you encountered such situations in Ghana?
That exactly what I’m saying. I suggested that because of the challenges with posting to WHT account. You can only carry the WHT in account receivable. It not the best but it ok.
I haven’t encountered any situation like that before but WHT receivable is no different from account receivable, those two WHT account are just there for convenience as you put it
Earlier
Of course tax asset should be properly disclosed but I don’t think a small WHT receivable not categorized properly could cause any problem.
So, @Abeiku, let me summarize my understanding of what I think you are saying:
- Enter any unpaid, pre-start-date sales invoices as usual. But do not check the box for withholding tax, because doing so would reduce the Accounts receivable amount without adding to Withholding tax receivable. (My post #6 did not address this part of the process. I was assuming you would enter the sales invoice at the reduced amount, but did not say so explicitly.)
- Record any monetary receipt from the customer against the sales invoices as normal. This will leave the withheld tax as still being receivable.
- Record any withholding certificates from the customer with a journal entry, crediting Accounts receivable for the customer and invoice and debiting a suitable equity account, such as Retained earnings. (I am choosing an equity account here because reducing the withholding tax asset will also reduce equity, but will not affect either income or expenses during the current period.)
That makes sense to me and avoids the problem I identified of unrecorded handling of the tax certificates. Prior to receipt of the tax certificates, their value was represented within the full receivable. After the receipt and journal entry, the receivable is gone, partially converted to money in a cash or bank account and the remainder having been used to pay a portion of your tax bill. In effect, you have given up equity by settling a tax bill with a receivable. Another way to think of this is that, initially, the government owned a piece of equity in the business by virtue of the tax destined to be paid but held by the customer. Then, the government held the same piece of equity by virtue of the tax remitted by the customer. Finally, the government gave up the equity when you applied the certificates to your tax bill.
Does all that make sense to you?
It makes sense but I’m not sure debiting some account in equity is the right thing. WHT credit certificates are proof of Corporate income tax paid in advance. So I think it should be used to offset or reduce the tax liability. I believe the same should be done for Sole proprietors.
Dr: Corporate tax liability account
Cr: Account Receivable.
To reduce current/Income tax liability balance with the withholding tax credit certificate received amount. (recovery of tax deducted at source)
If the Withholding tax deducted is non-refundable/cannot be claimed
Dr: A tax expense account (or the retained earnings account as prior year adjustment if the event happened in the prior year and the accounts have been published already)
Cr: Account Receivable
To record tax withheld at source which cannot be claimed.
If the Withholding tax account has been activated now and the tax credit certificate is received
Dr: Withholding tax
Cr: Account Receivable.
To move the WHT receivable balance on account receivable to the proper Withholding tax account with the amount on the tax credit certificate received.
The whole balance on the Withholding Tax account will be written off for tax returns.
Dr: Corporate tax liability account
Cr: Withholding Tax account
To reduce current/Income tax liability account with withholding tax credit certificate(s) received amount.
@Tut I added all those details because I know you are planning to write a guide.
I see several issues with your post #13, @Abeiku:
- Debiting a Corporate tax liability account only works if the tax is a liability of the business. For proprietorships and partnerships, it often is not.
- Likewise, debiting a Tax expense account only works if the tax is an expense of the business.
No, I am not. I think the existing Guide adequately covers what it covers. It specifically points out the need to choose an expense or equity account for the debit based on the situation. As I see it, the problem comes down to being able to set starting balances in some way. I see two possibilities:
- Set starting balances directly for the withholding tax asset accounts, but that would require a way to make them accessible before entering any sales invoices with the withholding tax option checked.
- Have pre-start-date sales invoices post withholding tax to Withholding tax receivable. (No other form of tax is posted anywhere for these invoices, but that makes sense for other taxes, which do not become assets.)
I am going to initiate an idea about this.
I have been reading this thread and vacillating as to whether I should make a post.
I was using the Withholding tax functionality in Manager up until about six months ago.
I decided to abandon using it for 2 reasons.
-
The process is too convoluted. I found having 2 accounts (Withholding tax receivable and Withholding Tax) unnecessary as both of these accounts represent a receivable until such time as tax is assessed and settled. (refund received or additional tax paid.)
-
The 2 inbuilt accounts (Withholding tax receivable and Withholding Tax) are not available for selection in either Sales Invoice or Purchase invoice.
It is easier to create a Withheld tax account in the chart of accounts and use a negative second line in the Sales invoice to account for tax withheld
At end of year tax time either a purchase invoice (additional tax to be paid) or sales invoice (tax refund due) can be used to record the assessed tax expense and clear the Withheld tax account