Starting VAT figure: new quarter

Here's how to handle your VAT opening balance on FreeAgent if your FreeAgent start date is at the start of a new VAT quarter (that's the three-month period covered by a VAT return).

It's unusual, but not unheard of, for your FreeAgent start date to be midway through a quarter.

Invoice accounting for VAT

If you're invoice accounting for VAT, the opening balance will usually only consist of one figure: the amount you owed to HMRC from your last VAT return. This applies whether or not you are using the VAT flat rate scheme.

Post this to code 817 on FreeAgent as part of your opening balances. This will be a credit entry (with a minus sign in front of it) because it's money you owe to HMRC.

Job done.

Cash accounting for VAT

If you're cash accounting for VAT, it gets a bit more complicated.

There will be three different components to your VAT opening balance: the amount of VAT that you owed to HMRC from your last VAT return, the VAT on the money that your customers owed you as at the end of the last quarter, and the VAT on the money that you owed to your suppliers at the end of the last quarter. If you're not sure how to work these out, your accountant should be able to help you.

You need to work out the three different components and post them separately as part of your opening balances.

Let's say that as at your FreeAgent start date, the total amount sitting as a liability for VAT in the trial balance which your accountant gives you is £1,900. Of that, you owe £2,000 to HMRC, the VAT on what your customers owe to you is £200, and the VAT on what you owe to your suppliers is £300.

The VAT that you owe to HMRC goes to code 817 VAT as a credit entry (with a minus in front of it). So you'd post -£2,000 to code 817.

The VAT on the money that your customers owe to you goes to code 823 Deferred VAT, also as a credit entry.

And the VAT on the money that you owe to your suppliers also goes to code 823 but as a debit entry (so no minus in front of it).

This means you've entered credits worth £2,200 and a debit of £300, which adds up to a net credit of £1,900 - the figure from your accountant's trial balance.

Cash accounting for VAT: additional notes for flat rate scheme users

If you're using the VAT flat rate scheme, you probably won't need to make an entry for VAT on bills that you owed to your suppliers, because you can't claim this VAT back from HMRC (unless it's on a large capital asset).

And when you're working out the VAT that your customers owed you, you'd use the amount of VAT from the invoices, so 20% or 17.5% of the net amount - not the flat rate VAT amount. This is because FreeAgent will work out the flat rate VAT for you when your customers pay.

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