Five most common FreeAgent user mistakes

We’ve been working with FreeAgent for about 4 years at time of writing, with currently 250+ clients actively using the software…in that time we’ve inevitably had to fix a lot of mistakes.  Many can be made even by very intelligent users following a logical (but slightly flawed) set of steps.

In no particular order these are:
Duplicating sales by wrongly explaining bank receipts,
Duplicating costs by using bills and wrongly explaining bank payments,
Duplicating bank transfers,
Incorrect VAT treatment on international sales,
Taking out more cash than you’re entitled to.

1) Duplicating sales by wrongly explaining bank receipts

Cause – Raising an invoice, then when it’s paid, marking the bank receipt as “sales” instead of “invoice receipt”.
Problem – By doing this, you’ve got the turnover (and potentially VAT) from the sale in the accounts twice, and despite the customer having paid, your invoice will still show as unpaid because the receipt isn’t correctly allocated to the invoice.
Potential further problem when client tries to fix(!) – What normally happens is a little further down the line the client sees the invoice showing as unpaid, so clicks “mark as paid”.  This doesn’t solve the problem.  Yes it means the invoice is now showing as paid, but it means FreeAgent adds a manual entry to the bank, duplicating the receipt.  So your bank no longer tallies up with reality.
Rectify – Go back to uploaded bank receipt and change from “sales” to “invoice receipt” and allocate to the appropriate invoice.  If you’ve already done the “mark as paid” thing, then you’ll need to manually delete the bank entry that created.  If you’ve filed VAT returns, locking the transactions, then you’d probably best speak to your accountant rather than DIY a fix as you’ve likely got a few knock on issues.

2) Duplicating costs by wrongly explaining bank payments

Cause – Exactly the same as above, but with bills.  People raise a “bill”, then when they pay it, explain the money out of the bank as “payment” instead of “bill payment”.
Problem – Again, this means the cost is in there twice, and whilst the cash has come out of the bank, the bill still shows as unpaid.
Rectify
– Change the money out of the bank from “payment” to “bill payment” and allocate to the appropriate bill.
Recommendation – We personally recommend simply not using bills.  For most small businesses where realistically costs are small and virtually always payable immediately, there’s no need.

3) Duplicating bank transfers

Cause – Explaining both sides of the same transaction independently so FreeAgent sees them as two separate, unrelated transactions.  So, you’ve got a savings account attached to your current account and you’re doing just what your mommy/accountant told you to do and putting some cash aside for your taxes/a rainy day.  Great.
However, what often happens is you first upload the current account statements, and explain the payment out of the current account correctly as a transfer to the savings account.  You then upload the savings account statement, and the receipt you mark as a transfer from the current account.  Right?  Well, sadly not.
Problem – When you explain the current account side as a transfer to the savings account, FreeAgent automatically puts a balancing transfer in to the savings.  Then if you explain the uploaded transfer in to the savings as a transfer in, it automatically puts a balancing transfer out in the current account.  So you end up with it in both accounts twice, throwing out the balances on both bank accounts.
Rectify – What you need to instead do is look for the “use existing manual entry” option when explaining the savings side (or  whichever side you explain second).  This tells FreeAgent that the uploaded transaction isn’t new, it’s simply the uploaded version of what FreeAgent already knows about from you explaining the other side.  So choose one of the uploaded transfer transactions, and amend the explanation, opting for usage of the existing manual entry.
Alternative – If a savings account only has transfers to/from the current account and the occasional bit of interest, you can potentially never bother to upload statements to the savings account.  The transfers should appear automatically from you correctly explaining the current account side, so you should simply need to manually enter the bank interest every now and again.

4) Incorrect VAT treatment of overseas sales

Cause – Manually marking sales to international clients as 0% VAT instead of telling FreeAgent the client is international (difference between “zero rated” and “outside the scope” of VAT).
Problem – If you’re on the “normal” VAT scheme, whilst doing the above is wrong, it won’t cause _too_ much of a problem.  Your VAT liability will be correct, just the net sales figure will be wrong.
However, if you’re on the flat rate scheme (FRS) as many freelancers/contractors are, then you lose out massively with this mistake.  Reason being international sales should be outside the scope of VAT, which means they are NOT included in FRS calculations.  Zero rated sales (how it’s treated if you simply manually alter the VAT rate to 0% on an invoice) ARE included in FRS calculations.  Making this mistake can therefore mean you pay over your FRS % on all your international sales when you shouldn’t be, which could be expensive.
Rectify – When you get an international client, ensure you use the “contact” section of FreeAgent properly.  Set the country drop down correctly (as this impacts VAT, it’s not just for show on the invoice), and ensure where no VAT is to be charged that the “Charge VAT” drop down is set set to either “Only if contact is also based in UK” (what it defaults to) or “Never”.
Exception – Perhaps worth mentioning here that if your international client is an end consumer (rather than VAT registered business) and is in the EU, then normally you would still charge them 20% UK VAT, so the above setting should be changed to “Always”.

5) Taking out more than you’re entitled to.

Cause – seeing lots of cash in the company bank account, forgetting/ignoring the fact you’ve got VAT/corporation tax bills on the horizon, and taking more cash than you should out for yourself.  Ok, so this problem isn’t remotely restricted to FreeAgent misuse, but thought it worth mentioning anyway, as it is something new small Ltd Co owners often struggle with.
Problem – Firstly, it’s illegal to take a dividend that puts the company into an insolvent position.  Reason being you’re defrauding the creditors, taking funds from the company that you’re not entitled to, as they should be set aside to clear company debts.
Secondly, it then means at some point not too far down the line the debt becomes payable, and your company quite probably doesn’t have enough cash to pay it.  At this point you moan to your accountant about how taxes are really high and life’s unfair, and are amazed that they have little sympathy.  At this point, you then either don’t pay the tax (leading to potential penalties and/or interest), or you scrabble around personally to try to find some cash to put back into the company to clear them.  Either way, not good.
Rectify – Ok so this isn’t much help if you’ve already done it…but my only advice is don’t allow yourself to get into that position in the first place.  FreeAgent makes this as easy as it can for you.  The very bottom right figure of your FreeAgent overview page should be marked “Carried forward/distributable”.  Provided your FreeAgent account is up to date and accurate, that’s the absolute maximum you can take as dividends whilst still leaving enough assets in the company to pay debts building up.  I wouldn’t recommend clearing it down to £nil every time, doing that means you’d literally just have enough to clear debts…with possible problems if a client doesn’t pay you, or unexpected costs arise.  Always a good idea to keep a healthy buffer in there, and also consider your personal tax position before declaring dividends.

Accountants/experienced users, any common ones you feel we’ve missed off?  Add them in the comments below!

3 thoughts on “Five most common FreeAgent user mistakes”

  1. One thing I’m sure a lot of people unintentionally get wrong (including myself) is dealing with bills from other EU suppliers, where you should technically deal with these supplies under the reverse charge (just as our clients should when we make out of scope supplies to them).

    Unfortunately this just isn’t something that FreeAgent supports, so I imagine most people don’t do this. It’s a weird one because strictly speaking it doesn’t affect your VAT liability, just your reporting.

    My understanding is that if you’re on the FRS then you only need to amend the VAT charged and VAT reclaimed boxes so they cancel each other out and I *think* this can be accomplished with journals but it’s a lot of faff if you have a lot of these.

    If you’re on the standard scheme then I think you also need to put the values in boxes 6 and 7 too but there is no way to change box 6 in FreeAgent using journals. This means you cannot use FreeAgent to submit your VAT return if you actually want to apply the reverse charge correctly, you need to use HMRCs online form instead.

    I’ve seen some accountants opinion that the reverse charge doesn’t even apply if you’re on the FRS, either way there is no easy way of dealing with this properly in FA. Are there consequences of not doing this? I understand the rationale behind the reverse charge, but I can’t help but think its typical pointless HMRC bureaucracy.

    1. Cheers for the comment.
      “Are there any consequences of not doing this?” – in a word, no. It’s a disclosure thing which of course to the strict letter of the law should be done properly. That said, especially if we’re only talking tens of pounds on an app/adwords/some other EU based cloud type thing, I wouldn’t feel guilty advising clients to forget about reverse charge. Like you say, the VAT liability doesn’t change, and on that basis I don’t see how HMRC could justify a penalty for not reflecting the reverse charge on the return.

      1. Thanks for the reply. My accountant pretty much advised me the same. Generally it’s web based services, mainly in the US (hosting, github etc.) although it came to my attention when I was looking at using Stripe for card processing and they are based in Ireland.

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