How to change your FreeAgent settings if you de-register your business for VAT.
You may decide to, or have to, de-register your business for VAT.
Here's how to enter that in FreeAgent.
Before you do this, make sure you've entered all the transactions that might have VAT on them into FreeAgent, and in particular, make sure you do this before submitting your final VAT return online. There's no way of undoing the de-registration once the final VAT return has been filed.
Select Settings, then select VAT Registration.
Change the "Are you VAT Registered?" drop-down menu option to say "De-registered".
Next, put in the date you de-registered for VAT. If you’re filing through Making Tax Digital (MTD), the date should be the day before HMRC notified that you successfully deregistered for VAT.
Save your changes.
FreeAgent will work out a final VAT return to your date of de-registration.
If you then file that VAT return, you won't be able to add VAT to any subsequent transactions (invoices, bills, expenses, etc.).
There may also be journal entries you need to make. More about that below.
And also, if you issue recurring invoices, check the profile, because FreeAgent will continue to issue the invoices for the net amount, without VAT.
So if you've been charging a customer £1,000 a month plus standard-rated VAT (so £1,200 when the VAT rate is 20%), FreeAgent will continue to issue monthly invoices for £1,000.
If you want to charge your customer £1,200 then you'll need to change the profile.
As far as HMRC are concerned, you can re-register your business for VAT - but FreeAgent doesn't handle this. If you re-register, you'd have to set up a new FreeAgent account.
Here are some reasons why you might get error messages.
Cash accounting for VAT
It's actually correct to prepare your last VAT return on the invoice basis, because you have to account on this return for any VAT on unpaid invoices or unpaid bills.
So you'll need to change the basis of your VAT return from cash to invoice.
The de-registration date cannot be before the registration date and, If you’re filing through Making Tax Digital (MTD), the date should be the day before HMRC notified that you successfully deregistered for VAT.
It also can't be in a period where the VAT return is locked in FreeAgent.
And if you have issued VAT invoices, the de-registration date can't be before the last VAT invoice you've issued, because HMRC say you mustn't issue VAT invoices after de-registration.
Journal entries around de-registration
The first is:
VAT on stock and assets you held when you de-registered
If you've reclaimed VAT on any stock you bought for re-sale, or any capital assets you bought to use in your business, and you still have that stock and/or those assets, and the total VAT on all these items added together them came to more than £1,000, then you have to pay back to HMRC the VAT you reclaimed.
FreeAgent doesn't work that out automatically so you'll need to post journal entries.
Date them the date on which you de-registered.
Credit account 817, VAT Charged, with the amount of VAT you have to pay back.
Debit either account 101, Cost of Sales (if you're paying back VAT on stock) or the appropriate capital assets brought forward or additions code (if you're paying back VAT on assets), with the amount of VAT.
You've lost me.
OK, let's take an example.
I've de-registered my business for VAT as from 30th September 2011. At the point of de-registration I held stock on which I'd reclaimed £750 of VAT, and assets on which I'd reclaimed £800 in VAT.
I'll post journal entries as follows:
- Credit 817 £1,550
- Debit 101 £750
- Debit 602 £800
VAT on bills you received after de-registration
If you receive a bill for work that was done before you de-registered (so say in the above example, my accountant had prepared my annual accounts to 31st August 2011, but hadn't billed me until 31st October 2011) then you can reclaim VAT on that bill.
But FreeAgent won't put that VAT on your final return if you date the bill on its correct date, i.e. 31st October 2011.
To reclaim the VAT you need to post journal entries, for the amount of the VAT you're reclaiming.
Date them the date on which you de-registered, and debit account 818, VAT Reclaimed, and credit the category where the bill belongs. In the above case that would be 285, Accountancy Fees.
If you don't know how much a bill will be for, you'll need to ask for an estimate from your supplier before you file your final VAT return.
They will then need to give you a VAT bill as soon as possible.
VAT on bad debts
When you're invoice accounting for VAT, you're entitled to claim bad debt relief if your customers don't pay you, i.e. claim back the VAT from HMRC.
HMRC say that you can do this even after you've de-registered.
In FreeAgent, selecting the "Write-off Unpaid" button after the date of de-registration won't affect the VAT accounts, so you'll need to post a journal entry when you select "Write-off Unpaid", posting the amount of the VAT you're reclaiming.
The entries, dated the same day as you wrote off the bad debt (which must be at least 6 months after the invoice date to qualify for bad debt relief) would be:
You'd then need to apply to HMRC for your refund.