Create the journal entries required after you de-register your business for VAT

This article explains how to create the journal entries that may be required after you have de-registered your business for VAT and updated your VAT settings in FreeAgent.

You will need to create journal entries after de-registering your business for VAT in the following scenarios:

Paying VAT on stock and assets you held when you de-registered

The scenario

If you reclaimed VAT on any stock you bought for resale or on any capital assets you bought to use in your business while it was registered for VAT, you will have to pay HMRC back the VAT that you reclaimed when you de-register if both of the following conditions also apply:

• The combined VAT on all these items came to more than a total of £1,000.
• You still have that stock and/or those assets.

Please note that FreeAgent's stock functionality won't be available if you have an unincorporated landlord account or if you're preparing your accounts using cash basis accounting.

How to create the journal entries

Follow the steps outlined below to create the journal entries to record this in FreeAgent. Please make sure you do this before filing your final VAT return:

• Date the journal entries with the date that you de-registered with HMRC.
• If you’re paying back VAT on stock or capital assets, credit account '819 - VAT Charged’, with the amount of VAT you will repay to HMRC.
• If you're paying back VAT on stock, debit account '101 - Cost of Sales’, with the amount of VAT you will repay.
• If you're paying back VAT on assets, you’ll then need to debit the appropriate ‘capital assets brought forward’ or ‘additions’ account with the amount of VAT.

For example, if you de-register your business for VAT on 30th September, and at that point you hold both stock on which you've reclaimed £750 of VAT and assets on which you'd reclaimed £800 in VAT, you should create the following journal entries with the date of 30th September:

• Credit account '819 - VAT Charged' with £1,550.
• Debit account '101 - Cost of Sales' with £750.
• Debit account '601-X' or '602-X' (select appropriate code for capital assets brought forward or purchased from the list of journal codes) with £800.

If you decide to re-register for VAT with HMRC in the future and are able to re-reclaim the VAT, please speak to your accountant about which journal entries you need to create.

Reclaiming VAT on bills you received after de-registration

The scenario

If you expect to receive a bill from a supplier after the de-registration date for work that was done before you de-registered, you can reclaim VAT on that bill when you de-register.

To reclaim the VAT you’ll need to create journal entries, for the amount of VAT you're reclaiming and date them the date on which you de-registered for VAT. Make sure you create these journal entries before filing your final VAT return to HMRC.

How to create the journal entries

Create the following journal entries with the date that you de-registered with HMRC:

• Debit account '818 - VAT Reclaimed’, with the amount of VAT you’re reclaiming from the bill.
• Credit the account you will allocate the bill to (e.g. '285 - Accountancy Fees’) You may need to ask the supplier for an estimated bill in order to reclaim the VAT on your final return.

Reclaiming VAT on bad debts after de-registration

The scenario

If you're using the invoice method of accounting for VAT and a customer doesn’t pay you, you're entitled to claim bad debt relief from HMRC. To qualify, the invoice must remain unpaid for at least six months after the invoice date. You can claim back VAT on bad debt relief after you've de-registered by creating a journal entry for the amount of VAT you're reclaiming.

Please note that in this case you don’t have to file your final VAT return before you post these journal entries.

How to create the journal entries

Create the following journal entries with the date that you wrote off the bad debt:

• Credit account '450 - Bad Debts Written Off' with the amount of VAT you’re reclaiming.
• Debit account '817 - VAT' with the amount of VAT you’re reclaiming.

Once the journal entries are recorded in FreeAgent, you will then need to apply to HMRC for your refund.

When you receive the refund, find out how to explain a VAT refund in FreeAgent.