A supplier invoice says £120.01 of VAT, your system calculates £120.00. A payment processor’s payout is a penny off the sales report. A euro invoice converts to a fraction of a penny. Rounding differences are tiny, but if they are posted to whatever account happens to be open, they accumulate in places that make reconciliations fail.
Where they come from
| Source | Cause |
|---|---|
| VAT per line versus per invoice | rounding each line produces a different total from rounding the invoice total |
| Supplier invoices | the supplier’s system rounds differently from yours |
| Foreign currency | conversion produces fractions of a penny |
| Payment platforms | fees calculated per transaction and summed in a payout |
| Payroll | tax and NIC rounding rules in payroll software |
HMRC accepts either method of rounding VAT on invoices, provided it is applied consistently; the VAT on a supplier invoice is what you reclaim, not your recalculation of it.
One account, used deliberately
Create a single rounding differences account within administrative expenses and post differences there only when they are genuinely rounding: under a set limit (for example a few pence per transaction). Anything bigger is an error to investigate, not a rounding difference.
| Account | Debit | Credit |
|---|---|---|
| Trade creditors | £0.01 | |
| Rounding differences | £0.01 |
Rounding on the VAT return
Box values on the VAT return are calculated from the VAT records. Where the VAT account and the supplier invoices differ by pennies, follow the invoice. Do not adjust the VAT control account to “make it round”: that creates a difference between the return and the ledger.
Review
- The rounding account should be tiny at any time. A balance of pounds or more means it is being used for errors.
- Look at the largest individual postings each quarter.
- Customer short payments are not rounding; see small balance write-offs.
For VAT codes and rounding on invoices see VAT codes in bookkeeping; for currency differences, foreign currency invoices.