How to create a VAT invoice for the disposal of a capital asset

This article explains how to create a VAT invoice for the disposal of a capital asset in FreeAgent.

Please note that you only need to follow the steps below as part of the process for scrapping or selling a capital asset. When a capital asset depreciates fully by reaching the end of the useful life you selected when you recorded the purchase of the asset, but you still have the asset, FreeAgent will automatically update your Capital Asset report to reflect this.

If your business is registered for VAT and you’re selling a capital asset that was recorded as a capital asset purchase, you’ll usually need to create a VAT invoice and enter manual bank transactions. Here’s how to do that.

1. Create a VAT invoice for the disposal

First, you’ll need to create a VAT invoice for the disposal.

To do this, navigate to the ‘Work’ tab at the top of the screen and select ‘Invoicing’ from the drop-down menu.

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Select ‘Add New Invoice’ and follow the steps for creating an invoice in FreeAgent for the amount of the disposal. You’ll need to add the invoice line item for the disposal as if it were ‘Sales’.

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Once you’ve created the invoice and the bank transaction relating to the income from the disposal has been imported into your FreeAgent account via a bank feed or uploaded from a bank statement, you can explain that bank transaction to mark the invoice as paid.

2. Enter manual bank transactions

Next, you’ll need to enter two bank transactions manually.

To do this, navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.

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Choose the relevant business bank account from the list.

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Navigate to the ‘More’ button and select ‘Add Transaction’ from the drop-down menu in the top-right of your business bank account.

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Select ‘Sales Refund’ from the ‘Type’ drop-down menu, select the same VAT option and enter the same amount as the VAT invoice you created. This will net off all the income and VAT entries made by the initial invoice and reduce the bank balance by the amount of the disposal.

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Once you’ve entered the relevant details, select ‘Create and Add Another’ at the bottom of the screen to create a second manual bank transaction.

For the second transaction, select ‘Disposal of Capital Asset’ from the ‘Type’ drop-down menu, select the same VAT option and enter the same amount from the VAT invoice you created. This will complete all the accounting entries for the disposal, correct the bank balance and pull the disposal through to the VAT return.

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Once you’ve entered the relevant details, select ‘Create and Finish’ at the bottom of the screen to complete the process.

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