Understanding and easily managing VAT rounding on an invoice

Accounting is an exact science… except when it gets disrupted by VAT rounding. These small differences of a few cents may seem insignificant, but they throw off your entire invoicing. Your accounting software isn’t to blame — the problem lies elsewhere. Here, we help you understand how VAT rounding works and how to manage it so your books stay accurate.

Rounding rules as set by the lawmaker

The rounding issue isn’t specific to VAT calculation — it was notably a headache during the switch from the French franc to the euro. On that occasion, a draft EU regulation on the introduction of the euro was politically approved at the European Council in Dublin in December 1996.

After conversion, amounts in euros had to be expressed with two digits after the decimal point — just like amounts in francs — using the smallest subdivision, the euro “cent” (since then, we’ve gotten back into the habit of calling it a centime). Since 1 euro equaled 6.55957 French francs, rounding issues cropped up everywhere. Given the complexity, the French Directorate General of Public Finances published a summary article covering the rounding rules, which includes the relevant legal texts and a few examples.

Regarding VAT specifically, you can also consult the official guidance published by the state for the tax return.

Since these texts are fairly complex, we’ve put together a plain-language summary so you can understand in a few minutes how all this works — and above all, how it’s resolved.

The rules of rounding in mathematics

Let’s go back to basics in case you’ve forgotten your school math lessons.

A rounded number is a value that approximates the original number. It is rounded down if it’s lower than the reference value, or rounded up if it’s higher.

1 – A number is rounded down when the last digit is less than 5.

For example, 12.2 rounded down is 12.

2 – A number is rounded up when the last digit is greater than 5.

For example, 12.8 rounded is 13.

3 – That leaves a third and final case: when the last digit is exactly 5. In this case, you must apply the rule set by the state, which mandates financial rounding — that is, rounding up to the next whole number.

For example, the financial rounding of 12.5 is 13.

The rule is the same regardless of how many digits follow the decimal point. For VAT rounding, you only keep 2 digits, as with the rest of your accounting.

For example:

• 12.244 will be rounded down to 12.24;
• 12.246 will be rounded up to 12.25;
• 12.245 will also be rounded up to 12.25.

The rules of VAT rounding in accounting

Things get complicated once you have several lines on your invoice, because there are two methods for rounding VAT. Indeed, unless you’re selling just one item or one service, your invoice will contain several lines — one per item or service.

Each line corresponds to an amount. A line covers one or more items or services; in the latter case, you multiply the quantity ordered by the unit price. In addition, you must specify the VAT rates, since a single invoice can be subject to several different VAT rates.

The law allows two methods for your VAT rounding:

• you round the amounts corresponding to each line of your invoice, which means you’re adding up figures that are already rounded;
• you round only the total pre-tax amount, which is equivalent to rounding a single figure.

And that’s where you start to see where the problem lies, and how you “gain” or “lose” a few precious cents depending on the method you use.

Here’s an example to illustrate this issue.

Using VAT rounding per line

Using VAT rounding on the total

You end up with a 1-cent difference between the two VAT rounding methods. This difference is multiplied by the number of invoices you issue. In the end, you can end up with a few euros of discrepancy over the quarter, and consequently over the year. This discrepancy therefore throws off your books for VAT returns as well as for your balance sheet.

For our Bizyness accounting software, we chose rounding at the item level.

NB: the rule changed as of 12/11/23 — Bizyness now calculates VAT on the total rounded for each VAT rate.

The magic accounts for settling differences caused by VAT rounding

Whichever method you use, what matters is that it complies with the law. So you are not at fault in the event of a discrepancy caused by VAT rounding. You also have two magic accounts available to resolve the issue caused by these fractions of a euro that throw your accounting off balance:

• Account 658 – Miscellaneous ordinary operating expenses;
• Account 758 – Miscellaneous ordinary operating income.

So don’t worry about the difference generated by VAT rounding — it is neither a mistake nor illegal, and it is settled using accounts 658 and 758. Your accounting therefore remains accurate and above reproach.