VAT in FreeAgent for accountants
This article explains how to set up the MTD for VAT connection, prepare to file a client’s VAT return and submit it to HMRC. It also explains how to make VAT corrections, update your client’s VAT registration settings, how the Flat Rate Scheme works and cash accounting for VAT.
How to set up the MTD for VAT connection
First, you'll need to create an agent services account with HMRC for your practice if you haven’t already done so. This will generate a new Government Gateway ID which will give your practice access to HMRC’s Making Tax Digital (MTD) services.
Next, you’ll need to add all of your practice’s existing Government Gateway credentials that are used for VAT filing on behalf of clients to your agent services account.
Then, you’ll need to request authority to file MTD VAT returns on behalf of any new clients directly from your agent services account and connect your agent services account to your Practice Dashboard.
You’ll need to renew this connection every 18 months. FreeAgent will display an ‘Expiring soon’ warning in the 'HMRC Connection' box on the right-hand side of your clients’ VAT returns 10 days before the connection is due to expire.
Find out more about how to set up your practice for Making Tax Digital (MTD) for VAT.
Once your practice is set up for Making Tax Digital (MTD) for VAT, you can switch each of your VAT-registered clients to MTD filing in FreeAgent.
How to prepare for filing a client’s VAT return
Before you make your first MTD for VAT submission on behalf of a client, there are a few things to check in order to ensure that FreeAgent creates an accurate VAT return.
1. Check your client’s accounting dates
Make sure that your client’s FreeAgent start date is correct, as this can have an impact on their VAT returns and can’t be changed once a VAT return has been filed.
2. Check your client’s VAT settings
Make sure that your client’s VAT registration details - including their first VAT return period end date - have been entered correctly in their VAT registration settings.
You might find the following articles useful for entering your client’s VAT registration settings in FreeAgent:
- What to do while waiting for your VAT registration number to be issued
- How to claim VAT back on purchases made before you were VAT-registered
- How to change the default VAT return period length
3. Check your client’s opening balances
Make sure that your client’s opening balances as at their FreeAgent start date have been entered fully. You can either import your client’s opening balances or enter them manually.
You might find the following articles useful for entering your client’s opening balances in FreeAgent:
- How to enter your opening balances for limited companies and LLPs
- How to enter your opening balances for sole traders and partnerships when using accruals basis accounting
- How to enter your opening balances for sole traders and partnerships when using cash basis accounting
- Starting VAT figure: mid-quarter (not Flat Rate Scheme)
- Starting VAT figure: mid-quarter (Flat Rate Scheme)
4. Ensure that all your client’s transactions are recorded in FreeAgent
In order to create VAT returns, FreeAgent needs to have the details of your client’s bank transactions, invoices, bills and out-of-pocket expenses. It’s important to enter these before filing the VAT return, as after you file it, FreeAgent will lock earlier periods and they'll no longer be editable.
Find out more about how to prepare your client’s account for Making Tax Digital (MTD) for VAT in FreeAgent.
How to file a client’s VAT return to HMRC
Please note that you'll only be able to file a client’s VAT return to HMRC once the VAT period has ended.
1. Navigate to the client’s VAT return
To begin the filing process, switch to the client’s account and navigate to the VAT return you want to file.
2. Review the figures
To view a breakdown of the figures, select the 'Full Report' tab. Please note that this breakdown is for reference only and is not sent to HMRC.
You might find the following articles useful for editing and adjusting VAT figures and settings in your client’s account:
- How to edit your VAT return
- How to adjust boxes 1 and 4 of your VAT return
- How to adjust boxes 6 to 9 of your VAT return
- How to change your VAT Flat Rate Scheme details mid-quarter
3. File the return to HMRC
Once you're happy with the figures and settings, select ‘File online with HMRC’ in the top-right to begin the filing process.
You might find the following articles useful for filing your client’s VAT return to HMRC:
- How to file a VAT return through FreeAgent
- Making Tax Digital (MTD) for VAT submission: error messages
- VAT error message: authentication failure
How to make VAT corrections
Once you’ve filed a VAT return with HMRC, you can’t change it.
If you need to make corrections, you can edit the invoice, bill, bank transaction or expense in question and FreeAgent will make those changes on your client’s next open VAT return. This is per HMRC’s guidance for how VAT errors should be corrected.
Find out how FreeAgent uses the deferred VAT account for VAT adjustments.
If you need to, you can unlock a client’s VAT return.
How to update your client’s VAT registration settings
If your client deregisters their business for VAT, you’ll need to cancel their VAT registration with HMRC and then update their VAT registration settings in FreeAgent.
There may be some journal entries you’ll need to create after your client has deregistered for VAT.
If your client then re-registers for VAT in the future, you’ll need to update their VAT registration settings in FreeAgent and create a new VAT registration period.
VAT Flat Rate Scheme
In FreeAgent, there is a pre-set nominal code for the VAT Flat Rate Scheme surplus (055 - Flat Rate Scheme Surplus).
Surplus calculations are made automatically so there's no need for you or your client to post journals.
When you or your client creates an invoice, FreeAgent will automatically work out the difference between the standard VAT as recorded on the invoice, and the flat rate VAT.
It'll automatically post the journal entries to allocate the flat rate amount to the '819 - VAT Charged' code to go on the VAT return.
The difference between the flat rate and standard rate amounts will be posted to the '055 - Flat Rate Scheme Surplus' code.
FreeAgent will not record any input VAT, except on purchases of large capital assets, so as long as your client record these purchases correctly, they won't need to worry about this.
Cash accounting for VAT
If your client is using cash accounting for VAT, when you or your client create an invoice, the VAT element of the invoice is posted to code '823 - Deferred VAT'.
This will then not appear on the VAT return until the invoice has been paid.
Once the invoice has been paid, FreeAgent will automatically post a journal to move the VAT out of the deferred code.
And into the '819 - VAT Charged' code.
It will also put this amount on the VAT return in the quarter in which it was paid so your client doesn't need to worry about making sure the VAT goes on to the return in the correct period.
Bills and bank payments
FreeAgent will do the same for bills, putting the input VAT into code '823 - Deferred VAT' until your client pays the bill, when it will automatically journal the input VAT into the '818 - VAT Reclaimed' code and put it on the VAT return.
FreeAgent will also pick up the input VAT on any bank transactions straight away so you and your client don't need to worry about the figures being correct.
Additional resources
You might find the following VAT articles useful: