Account for withheld tax

This article explains how to account for tax withheld on a sale by a customer.

Tax is typically withheld by a customer when trading internationally. This is because some countries have a requirement to keep back income tax when paying invoices, similar to CIS or IR35 in the UK.

Please note that if double tax relief is available for the tax already withheld, you’ll need to file your Self Assessment tax return or Corporation Tax return outside FreeAgent in order to claim this relief. If you’re unsure whether double tax relief is available for the withheld tax, please ask your accountant.

There are three steps you’ll need to take in order to show withholding tax correctly within your FreeAgent account:

1. Set up a new custom category to explain the withholding tax to
2. Issue an invoice to your customer
3. Split the payment from your customer

1. Set up a new custom category to explain the withholding tax to

First, you’ll need to add a new accounting category to explain the withholding tax to.

If you don’t expect the tax to be repaid to you, you’ll need to set up a new custom cost category. However, if you do expect the tax to be repaid to you, you’ll need to set up a new custom current asset category.

If you’re unsure which type of category to create, please ask your accountant.

Call this something suitable such as ‘Withholding tax’ and choose the relevant 'Reporting Name' which will be different for each FreeAgent account type. If you’re unsure what the ‘Reporting Name’ or rate of VAT should be, please ask your accountant.

2. Issue an invoice to your customer

Next, create an invoice for your customer as normal for the full value of the service or product that the invoice is for. Don’t deduct the withholding tax from the value on the invoice.

If you need to show the value of the withholding tax, you can do this by adding a comment or additional text. Don’t show the tax as a negative value invoice line item as the income will not be accounted for in full.

3. Split the payment from your customer

Finally, when you receive the payment from your customer, you’ll need to split the transaction.

To do this, select the transaction for the payment you received, then choose 'More options’ from the 'Adjustments' drop-down menu. Alternatively, you can hold down the 'alt' key on your keyboard while you select the transaction.

Select 'Invoice Receipt' from the ‘Type’ drop-down menu, then change the value to the full amount of the sale, £1,020 using this example.

Select ‘Create New Explanation’.

You'll see that FreeAgent has now added a new transaction for the amount of withheld tax, to ensure the running total in the bank account is correct.

You’ll need to explain this to the new category you created.

Please note that if you explain the Payment transaction to the new custom current asset category as you're expecting it to be repaid, the repayment bank transaction when received would be explained to the same custom asset category using Type > Other Money In and selecting the custom current asset category.