There seems to be a lot of wailing and gnashing of teeth about the upcoming VAT change. Especially as it is only a 13 month change and the rate will revert to 17.5% in 2010.

However, it ought to be really simple (although I realise that this may be a bit late for some computer systems).

Never hard-code the VAT rate

Have a Tax class that the rest of the system can ask when it needs the tax rate. That way, you’ve only got one place to make the change.

Store the rate against your invoice lines

Add a field to your invoice lines that stores the rate applicable for that line. Populate this when the line is created. That way, an invoice at tax point 30th November 2008 will have lines with a 17.5% stored against them, those created on the 1st December 2008 will have a 15% stored against them. This keeps your most vital financial documents accurate over time.

Calculate the VAT as late as possible

When calculating the VAT on an invoice do not do this:

value_excluding_vat = 0

vat = 0

value_including_vat = 0

for each line in my invoice

  value_excluding_vat += line.value

  vat += line.value * line.tax_rate

  value_including_vat += line.value + (line.value * line.tax_rate)

The problem here is that you are calculating the VAT on a per line basis and then summing the values. This will lead to rounding errors – where your line values are a penny out from your totals.

Instead you need to place each line into a “bucket” for its tax rate, sum all values for a given rate and then calculate the tax on that. That way you are working on the largest numbers possible, reducing the risk of small decimal place discrepancies throwing your totals out.

value_excluding_vat = 0

for each line in my invoice

  bucket = the_bucket_for line.vat

  bucket.value += line.value

  value_excluding_vat += line.value

vat = 0

for each bucket in my collection of buckets

  vat += bucket.value * bucket.rate

value_including_vat = value_excluding_vat + vat

Have a Tax Band and Tax Rate model that deals with changes over time

If you really want to have a “minimal administration” system for dealing with tax rate changes then you should switch your data model to have multiple Tax Band objects (as remember, there are multiple VAT bands – “standard” is 17.5/15%, “low” is 5%, “zero-rated” is 0% and “exempt” is also 0% but needs to be accounted for separately to “zero-rated”).

Each Tax Band object should have a set of Tax Rate objects hanging off it – where each Tax Rate has a percentage rate and a start and end date. That way you can ask your “Standard Rate” tax object “what is the percentage on the 30th November 2008?” and it can give you the correct answer.

That makes dealing with a change like this simple – you simply go to the “Standard Rate” object, find it’s current rate object and set its end date to 30th November 2008. Then you add a new rate object to the “standard rate” of 15%, setting its start date to 1st December 2008, with an end date of 31st December 2009. Lastly, add another 17.5% rate object, with a start date of 1st January 2010 and no end date.

Update the rest of your systems to always ask the relevant tax object for the correct rate and tax rate changes will never be a headache again.