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How to prepare for Making Tax Digital (MTD) for VAT in FreeAgent

This article explains what Making Tax Digital (MTD) for VAT is and how to prepare for it in FreeAgent.

Please note that this article is written for small business owners. If you’re an accountant, find out how to set up your practice for MTD for VAT.

An introduction to MTD for VAT

Making Tax Digital (MTD) is a government initiative aiming to digitise the UK tax system.

HMRC requires businesses with VATable sales above the VAT threshold to file VAT returns through MTD for VAT. From 1st April 2022, all VAT-registered businesses will be required to sign up. If your VATable sales are below the VAT threshold, you can choose to sign up for MTD for VAT now.

Before you start

From 8th April 2021, you will need to sign up for MTD for VAT and use FreeAgent’s MTD connection in order to file your VAT returns to HMRC using FreeAgent. Find out how to sign up and set up the connection.

HMRC advises signing up to MTD for VAT at least one week before your VAT return is due, to make sure that everything is ready for your submission. If you’re not sure whether you need to sign up for MTD for VAT, speak to your accountant.

Preparing your accounts in FreeAgent

Before you make your first MTD for VAT submission, there are a number of things you will need to check in order to ensure that FreeAgent creates an accurate VAT return.

1. Check your accounting dates

Your FreeAgent start date is the date from which you started keeping your books in FreeAgent. Find out more about the FreeAgent start date for new businesses and existing businesses.

Your FreeAgent start date can have an impact on your VAT returns, so it’s important that you check that this is correct.

To view or change your FreeAgent start date, select ‘Settings’ from the drop-down menu at the top-right of the screen and then select ‘Accounting Dates’ in the ‘Accounting, Tax & VAT’ section.

2. Check your VAT settings

You should ensure that your VAT registration details have been entered correctly and check your first VAT return period end date in your VAT registration settings.

To view or change these details, select ‘Settings’ from the drop-down menu at the top-right of the screen and then select ‘VAT Registration’ in the ‘Accounting, Tax & VAT’ section.

3. Record your opening balances

You will need to record your opening balances as at your FreeAgent start date. The way you need to enter your VAT opening balance in FreeAgent depends on whether your FreeAgent start date is at the start of a VAT quarter. For more details, see the following:

4. Ensure that all your transactions are recorded in FreeAgent

In order to create your VAT returns, FreeAgent needs to have the details of your bank transactions, invoices, bills and out-of-pocket expenses.

Bank transactions

We recommend that you import your bank transactions into FreeAgent automatically by setting up a bank feed. If a bank feed isn't available for your bank, or you need to import historic transactions that are outside the scope of your bank feed, you will need to either upload bank statements or enter transactions manually. If you have a bank feed set up to import transactions automatically, be careful not to duplicate any of these transactions with a manual import.

After your bank transactions have been imported or uploaded, you will need to explain them. Once you’ve started explaining transactions, FreeAgent’s Guess feature will attempt to explain your transactions automatically. Find out more about how to manage Guess.

Income and costs

To record your income, you can create invoices or explain the money you receive into the bank as ‘Type - Sales’ if you’re not sending invoices. If you receive cash payments, find out how to record cash transactions in FreeAgent.

To record your costs, you can create supplier bills, add out-of-pocket expenses or explain the money out of the bank as ‘Type - Payment’ and select the relevant cost category.

Before entering this data, it’s a good idea to familiarise yourself with the difference between an expense, a bill and a bank payment in FreeAgent.

Other things to remember

By enabling bank feeds and regularly explaining your imported bank transactions, the bank balance in FreeAgent should match the balance in your online bank account. If the figures don't match, follow our guidance for addressing discrepancies.

If any of your transactions have been explained incorrectly, find out how to edit and remove bank transaction explanations. If you need to create a credit note, make sure that you correctly net it off with the invoice.

You might have data that you need to enter from a time prior to the period covered by the VAT return that you’re filing. You should enter this data before you file your VAT return because after you file it, FreeAgent will lock earlier periods and they will no longer be editable.

How to file VAT returns via MTD

Once you’ve completed the steps above, you’ll be ready to file your VAT return directly to HMRC using FreeAgent.

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