How to record the purchase of multiple capital assets with one bank transaction if you’re on the VAT Flat Rate Scheme

This article explains how to record the purchase of multiple capital assets that were paid for with a single bank transaction if you’re on the VAT Flat Rate Scheme.

If you purchased a single capital asset using multiple bank transactions, find out how to record the purchase of a capital asset using multiple transactions.

If your business is on the VAT Flat Rate Scheme, you’re entitled to reclaim VAT on the purchase of capital assets over £2,000 when the assets were bought in one transaction. This applies even if the individual assets themselves cost less than £2,000.

For example, if you bought a computer for £1,500 and a printer for £600 in a single purchase, and paid £420 of VAT, a single bank transaction for £2,520 will appear in FreeAgent.

To record the purchase, you’ll need full (level 8) access to your FreeAgent account and follow the steps below to:

  1. Split the bank transaction
  2. Create journal entries to reclaim the VAT
  3. Adjust box 7 of your VAT return.

1. Split the bank transaction

Once the relevant bank transaction has been imported into your FreeAgent account via a bank feed or uploaded from a bank statement, you’ll need to split the transaction into the individual values of the capital assets excluding VAT.

Select the transaction that you’d like to explain and select ‘More Options’ in the bottom corner. Alternatively, you can press the 'Alt' key (if you’re using a PC) or ‘Option’ key (if you’re using a Mac) whilst selecting a bank transaction to open ‘More Options’.

More options highlighted when explaining a bank transaction.png

Allocate the appropriate amount to the first asset

Select ‘Purchase of Capital Asset’ from the ‘Type’ drop-down menu, enter the amount you’d like to allocate to the first capital asset purchase in the ‘Value’ field and select ‘0%’ from the ‘VAT’ drop-down menu.

First capital asset purchase being allocated.png

Select whether you’d like any depreciation to be calculated using the ‘Straight line’ or ‘Reducing balance’ method, or whether the asset should not depreciate.

Depreciation options for first bank transaction.png

If you select the ‘Straight line’ method, select the number of years that the asset will be useful to the business from the ‘Asset life’ drop-down menu. Please note that you can select a maximum of 25 years.

Asset life highlighted for first bank transaction.png

If you select the ‘Reducing balance’ method, enter the relevant percentage in the ‘Depreciation rate’ field. If you’re not sure what percentage to choose, please ask your accountant.

Depreciation rate highlighted for first bank transaction.png

Once you’ve selected the relevant method, select the relevant asset purchase category from the ‘Asset Type’ drop-down menu.

Asset type highlighted for first bank transaction.png

Select ‘Create New Explanation’ at the bottom of the screen to explain the amount to the first capital asset.

Allocate the appropriate amount to the second asset

Next, you’ll need to explain and categorise the relevant amount of the bank transaction to the other capital asset. You’ll notice that FreeAgent has created a new transaction for the remaining amount to be explained. In the above example, we’ve explained £1,500 of the original £2,520, so FreeAgent has created a new transaction for the remaining £1,020.

unexplained screenshot highlighted.png

To explain the remaining balance between multiple categories, select the new red transaction and select ‘More Options’ in the bottom corner. Alternatively, you can press the 'Alt' key (if you’re using a PC) or the ‘Option’ key (if you’re using a Mac) whilst selecting a bank transaction to open ‘More Options’.

More options highlighted for second transaction.png

Select ‘Purchase of Capital Asset’ from the ‘Type’ drop-down menu, enter the amount you’d like to allocate to the second capital asset purchase in the ‘Value’ field and select ‘0%’ from the ‘VAT’ drop-down menu.

Second capital asset being allocated.png

Select the relevant depreciation method and select the relevant asset purchase category from the ‘Asset Type’ drop-down menu.

Depreciation and asset type selected for second bank transaction.png

Select ‘Create New Explanation’ at the bottom of the screen to explain the amount to the second capital asset.

Explain the remaining balance

Next, you’ll need to explain and categorise the VAT, which should be the remaining balance of the bank transaction if you’ve purchased two capital assets. If you’ve purchased additional capital assets, follow the steps above to split the transaction again and allocate the amount to the next asset.

You’ll notice that FreeAgent has created a new transaction for the remaining amount to be explained.

final unexplained transaction highlighted.png

Select the new red transaction, then select ‘Other Money Out’ from the ‘Type’ drop-down menu and select ‘Payment from Contra Account’ from the ‘Category’ drop-down menu.

Transaction being explained for the VAT.png

Select ‘Explain transaction’ to complete the process and explain the bank transactions in full.

2. Reclaim the VAT

After you’ve recorded the capital asset purchase, you’ll need to create journal entries, dated the same date as the bank transaction, for the VAT amount that was posted to the contra account above:

  • Debit code ‘818 - VAT Reclaimed
  • Credit code ‘998 - Contra Account

If you’re unsure which journal entries are required, please speak to your accountant.

3. Adjust box 7 of your VAT return

If the values of any of the individual capital assets are under £2,000, FreeAgent will not add these to your VAT return, therefore you’ll need to manually adjust box 7 of your VAT return.

Example of box 7 of VAT return being adjusted.png

If you’re unsure how much to adjust box 7 of your VAT return by, please speak to your accountant.

Did you find this article useful?