Here's how to explain a bank transaction as a sale, or purchase, of goods or services outside the UK but within the EU. It's particularly important to tag your transactions correctly if you are required to file an EC Sales List (ESL).
Please note that the guidance in this article only applies to transactions dated 31st December 2020 or earlier. For transactions dated on or after 1st January 2021, please follow the guidance in this article.
Before you can tag these transactions as EU, you need to enable these VAT options in FreeAgent.
To do this, select 'Settings' at the top right of the screen and then select 'VAT Registration'.
Select 'Yes' in the 'Do you need to use VAT rates other than standard UK ones?' section.
Save your changes.
As you explain the transaction, you have the option to tick whether it's not from the EC, whether it relates to EC Goods, or EC Services.
Tick the appropriate box to tag the transaction.
I can't see the tags.
Some transaction types can't be tagged, for example invoice receipts, because in that case it's the invoice that you tag.
How will FreeAgent report the tagged transactions, and how should I set the VAT rates?
That depends on the tag and the circumstances. Please note that UK transactions count as "Non-EC".
EC Goods - Money In
If you tag a Money In transaction as EC Goods, and you're allowed to zero-rate that sale of goods according to HMRC's rules, then as well as tagging the transaction as EC Goods, you need to set the VAT rate as 0%.
If you do this correctly, and you're not on the Flat Rate Scheme, FreeAgent won't put any VAT in box 1, but would add the amount of the receipt to boxes 6 and 8 of your VAT return.
And if you're on the Flat Rate Scheme, this receipt would be treated as part of your flat rate turnover and have flat rate VAT worked out on it, which would go in box 1. Boxes 6 and 8 would also contain the amount of the receipt.
EC Goods - Money Out
If you tag a Money Out transaction as EC Goods, FreeAgent will assume that there's acquisition tax on those goods and that box 2 needs to be filled in. For this to work, you need to set the VAT as either 0% or Auto.
It'll then put that amount into box 2, and, unless you're on the Flat Rate Scheme, it'll also put this into box 4 so that you don't pay any extra VAT on those goods.
Finally, it'll add the amount of the payment to boxes 7 and 9 of your VAT return.
EC Services - Money In
If you tag a Money In transaction as EC Services, this sale is outside the scope of UK VAT, according to HMRC's rules on the place of supply, so you need to set the VAT rate as 'Out of Scope'.
So it won't put any VAT in box 1.
But it will put the amount in box 6, even though usually sales outside the scope of VAT don't go in here, because HMRC specifies that sales of services to the EU do go into box 6. Further information can be found in paragraph 3.7 and 4.1 of this gov.uk article.
EC Services - Money Out
If you tag a Money Out transaction as EC Services, you also need to set the VAT rate as 'Auto', so that FreeAgent doesn't reclaim input VAT.
Nothing will appear in box 2 or box 9 of your VAT return, because those boxes are just for goods.
FreeAgent will then work out the reverse charge on these services.