How FreeAgent uses the deferred VAT account
This article explains why there might be some entries in the ‘Deferred VAT’ account in FreeAgent.
Category ‘823 - Deferred VAT’ is a holding account that FreeAgent uses for VAT adjustments. Entries to this category will not modify any of the figures on your VAT return or change the balance on your VAT ‘Statement of Account’.
You can view any entries to this category by navigating to the Show Transactions report.
There are several different situations when the ‘Deferred VAT’ account is used to make VAT adjustments in FreeAgent. These include expenses dated before the FreeAgent start date, corrections in a VAT locked period, cash accounting for VAT and invoice accounting for VAT.
Expenses dated before the FreeAgent start date
If you create an out-of-pocket expense dated before your FreeAgent start date, any VAT on that expense is deferred to the FreeAgent start date as that’s the earliest date the cost can be included in your accounts.
We don’t recommend you enter any transactions dated before the FreeAgent start date and would suggest you change the date of the expense to your FreeAgent start date. Find out more about how to enter expenses you incurred before the FreeAgent start date.
Corrections in a VAT locked period
If you make a correction in a VAT locked period, the amount of the VAT adjustment will be posted to the ‘Deferred VAT’ account on the date of the corrected item.
If the correction is related to VAT charged to your customers, the amount of the VAT adjustment will then automatically be moved from ‘823 - Deferred VAT’ to ‘819 - VAT Charged’ on the first day of the current open VAT period. This ensures that the amount is included in box 1 on that VAT return.
If the correction is related to VAT reclaimed on costs, the amount of the VAT adjustment will then automatically be moved from ‘823 - Deferred VAT’ to ‘818 - VAT Reclaimed’ on the first day of the current open VAT period. This ensures that the amount is included in box 4 on that VAT return.
Cash accounting for VAT
If you are cash accounting for VAT and you create an invoice or bill, this will result in an entry being posted to the ‘Deferred VAT’ account. Please note that this is different from using cash basis accounting to prepare your accounts, so please check with your accountant if you’re unsure which basis you should be using for your VAT returns.
Invoices
If you create an invoice, the VAT that you charge to your customer will be posted to the ‘Deferred VAT’ account on the date the invoice is created. This is because the VAT shouldn't be accounted for until you’ve received the income when you’re cash accounting for VAT.
You can see a list of which invoices are unpaid at any given date and a figure of how much VAT there is on the unpaid amount by navigating to the Aged Debtors report.
When the invoice is marked as paid, the amount of VAT will then automatically be moved from ‘823 - Deferred VAT’ to ‘819 - VAT Charged’. This ensures that the amount is included in box 1 on the VAT return.
Bills
If you create a bill, the VAT that you reclaim from HMRC will be posted to the ‘Deferred VAT’ account on the date the bill is created. This is because the VAT shouldn't be accounted for until you’ve paid for the costs when you’re cash accounting for VAT.
You can see a list of which bills are unpaid at any given date and a figure of how much VAT there is on the unpaid amount by navigating to the Aged Creditors report.
When the bill is marked as paid, the amount of VAT will then automatically be moved from ‘823 - Deferred VAT’ to ‘818 - VAT Reclaimed’. This ensures that the amount is included in box 4 on the VAT return.
Invoice accounting for VAT
If you’re invoice accounting for VAT and your customer pays, or partly pays, an invoice before the invoice date, this will post an entry to the ‘Deferred VAT’ account. Please note that this is different from using accruals basis accounting to prepare your accounts, so please check with your accountant if you’re unsure which basis you should be using for your VAT returns.
When an invoice is marked as paid before the invoice date, the amount of VAT on that payment will be posted to the ‘Deferred VAT’ account to hold it there until the invoice date. The amount of VAT on that payment will also be posted to ‘819 - VAT Charged’ on the date of the payment to include the amount in box 1 of the VAT return.
Then, on the invoice date, FreeAgent will automatically post a credit entry to ‘823 - Deferred VAT’ for the amount of VAT on the payment to clear the balance in that category. If the invoice has been partly paid and there is an outstanding balance on the invoice date, any VAT on that remaining amount will be posted to ‘819 - VAT Charged’ on that date to include it in box 1 on the VAT return.
Please note that if you create a bill when you’re invoice accounting for VAT, the VAT will be included in box 4 on the VAT return on the bill date regardless of when the bill is paid. This is because HMRC doesn’t allow you to reclaim VAT until you have proof of how much VAT you’ve incurred, which would be on the bill. That means that bills won’t usually affect the ‘Deferred VAT’ account when using the invoice accounting basis for VAT.