How to enter opening VAT balances (new quarter)

This article explains how to enter your VAT opening balances if your FreeAgent start date is at the start of a new VAT quarter.

The opening VAT balances that you need to enter depend on whether you’re invoice accounting for VAT or cash accounting for VAT.

If your FreeAgent start date is midway through a quarter, find out how to enter opening VAT balances when your FreeAgent start date is midway through a VAT quarter.

Invoice accounting for VAT

If you're invoice accounting for VAT, you'll usually only need to enter the amount owed to, or from, HMRC from your last VAT return. This applies whether or not you’re using the VAT Flat Rate Scheme.

Enter this as part of your opening balances as a credit (if it’s money owed to HMRC) or debit (if it’s money HMRC owes you) entry to code ‘817 - VAT’ in FreeAgent.

Cash accounting for VAT

If you're cash accounting for VAT, you'll need to enter the following three amounts (unless you’re on the VAT Flat Rate Scheme):

• The amount of VAT that you owed to, or from, HMRC from your last VAT return.
  
  
• The amount of VAT on the money that your customers owed to you as at the end of the last quarter.
  
  
• The amount of VAT on the money that you owed to your suppliers as at the end of the last quarter.

For example, the total amount sitting as a liability for VAT in the trial balance which your accountant gives you as at your FreeAgent start date is £1,900. Of this, 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.

In this scenario, you’d need to enter the following VAT opening balances:

• Credit code ‘817 - VAT’ for the amount of VAT that you owe to HMRC from your last VAT return (£2,000 in the example above).
  
  
• Credit code ‘823 - Deferred VAT’ for the amount of VAT on the money that your customers owed to you as at the end of the last quarter (£200 in the example above).
  
  
• Debit code ‘823 - Deferred VAT’ for the amount of VAT on the money that you owed to your suppliers as at the end of the last quarter (£300 in the example above).

Cash accounting for VAT and using the Flat Rate Scheme

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

Therefore, you’ll probably only need to enter the following VAT opening balances:

• Credit code ‘817 - VAT’ for the amount of VAT that you owe to HMRC from your last VAT return (£2,000 in the example above).
  
  
• Credit code ‘823 - Deferred VAT’ for the amount of VAT on the money that your customers owed to you as at the end of the last quarter (£200 in the example above).

When you're working out the VAT that your customers owed you, use the amount of VAT from the invoices, e.g. 20% of the net amount. Don’t use the flat rate VAT amount as FreeAgent will work out the flat rate VAT for you when your customers pay.

If you're unsure how to work these out, please ask your accountant.

Explaining the payments in FreeAgent

When you pay the balance to HMRC that you owed from the previous quarter's VAT return, find out how to explain a VAT payment to HMRC.

When your customers pay you the money they owe and you’re explaining the bank transactions, select ‘Other Money In’ as the transaction ‘Type’ and ‘Receipt from Initial Debtor’ as the transaction ‘Category’.

When you pay the money that you owe to your suppliers and you’re explaining the bank transactions, select ‘Other Money Out’ as the transaction ‘Type’ and ‘Payment to Initial Creditor’ as the transaction ‘Category’.

The effect on your VAT return

FreeAgent will treat all payments to initial debtors and creditors as including 20% VAT when cash accounting for VAT.

If the payment has a different rate of VAT or is out of scope for VAT, you’ll need to adjust the figures in boxes 1 and 4 of your VAT return by creating the following journal entries:

If you’re using the Flat Rate Scheme

• Debit code ‘055 Flat Rate Scheme Surplus’ for the amount you want to decrease the figure in box 1 by (£33.33 using the example above).
  
  
• Credit code ‘823 Deferred VAT’ for the amount you want to decrease the figure in box 1 by (£33.33 using the example above).

If you’re not using the Flat Rate Scheme

Adjust box 1

• Debit code ‘819 - VAT Charged’ for the amount you want to decrease the figure in box 1 by (£33.33 using the example above).
  
  
• Credit code ‘823 Deferred VAT’ for the amount you want to decrease the figure in box 1 by (£33.33 using the example above).

Adjust box 4

• Credit code ‘818 - VAT Reclaimed’ for the amount you want to decrease the figure in box 4 by (£50 using the example above).
  
  
• Debit code ‘823 Deferred VAT’ for the amount you want to decrease the figure in box 4 by (£50 using the example above).

You may also need to adjust boxes 6 to 9 of your VAT return.

If you’re unsure which adjustments you need to make, please ask your accountant.