Knowledge Base Getting Started Frequently Asked Questions

How to record the purchase of services from the EU before 1st January 2021

This article explains how UK VAT-registered businesses should record the purchase of services from businesses based in the EU where the purchase was dated before 1st January 2021.

To record the purchase of services from any country outside the UK following the finalisation of the UK’s departure from the EU on 1st January 2021, please follow the guidance in this article.

If you buy services from suppliers in the EU, these will not normally have UK VAT on them. However, you may have to use the reverse charge mechanism to account for VAT.

For information on how to record the purchase of goods from the EU before 1st January 2021, please see this article.

Enabling VAT rates for trade outside the UK

Before you can record purchase transactions with overseas businesses in FreeAgent, you will need to enable VAT rates for trade outside of the UK.

To do this, select ‘Settings’ from the drop-down menu at the top-right of the screen and select ‘VAT Registration’.

Screenshot_2021-10-18_at_14.23.54_copy_6.png

On the ‘UK VAT Registration’ page, scroll down to the ‘VAT settings’ section and select ‘Yes’ in response to the question ‘Do you need to use VAT rates other than standard UK ones?’. Select ‘Save Changes’ at the bottom of the screen to complete the process.

Sale_of_goods_1.png

Recording the purchase of services from the EU

If you purchased services from a business based in the EU, record the purchase by either explaining a bank transaction as a ‘Payment’ or creating an out-of-pocket expense or bill. Please note that recording the purchase using more than one method will result in your cost being double- or triple-counted. For information on the difference between an expense, a bill and a bank payment in FreeAgent, please see this article.

Explaining a bank transaction

If you’re explaining a bank transaction instead of creating an out-of-pocket expense or bill, navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.

Sale_of_goods_2.png

Choose the relevant bank account from the list.

Sale_of_goods_3.png

Select the transaction that relates to the purchase and select ‘More Options’.

Purchase_of_services_1.png

Select ‘Payment’ from the ‘Type’ drop-down menu.

Purchase_of_services_2.png

Select ‘EC Services’ from the ‘EC Status’ options and select ‘Auto’ from the ‘VAT’ drop-down menu. Please note that you won’t see these options if the bank transaction is dated on or after 1st January 2021.

Purchase_of_services_3.png

Select ‘Create New Explanation’ at the bottom of the screen to complete the process.

A record of the bank transaction being explained will appear in your Audit Trail report.

Purchase_of_services_4.png

Local VAT at a rate other than 0%

However, if you’ve been charged local VAT overseas at a rate other than ‘0%’, you’ll need to record the transaction as ‘UK/Non-EC’ and ‘Out of Scope’ for VAT. This is because you can't reclaim non-UK VAT through your UK VAT return. If you’re unsure which VAT rate to select, please ask your accountant.

In this scenario, you’ll need to claim back the VAT through HMRC. Once you’ve reclaimed the VAT and the transaction is imported into FreeAgent, select ‘Refund’ as the transaction ‘Type’ and select the cost category where the cost of the services was allocated to. Use the VAT rate ‘Out of Scope’. This will ensure that it is not recorded on your UK VAT return.

Creating an out-of-pocket expense

If the purchase was paid for using personal funds and you’re creating an out-of-pocket expense instead of explaining a bank transaction or creating a bill, navigate to the ‘My Money’ tab at the screen and select ‘Expenses’ from the drop-down menu.

Purchase_of_goods_7.png

Select ‘Add New’ in the top-right and select ‘Expense’ from the drop-down menu.

Purchase_of_goods_8.png

Complete the relevant details for the out-of-pocket expense. Select ‘0%’ from the ‘VAT’ drop-down menu and ‘EC Services’ from the ‘EC Status’ options. Please note that you won’t see these options if the out-of-pocket expense is dated on or after 1st January 2021.

Purchase_of_services_5.png

Select ‘Create New Expense’ to complete the process. For more information on how to create an out-of-pocket expense, please see this article.

A record of the out-of-pocket expense being created will appear in your Audit Trail report.

Purchase_of_services_6.png

Local VAT at a rate other than 0%

However, if you’ve been charged local VAT overseas at a rate other than ‘0%’, you’ll need to record the out-of-pocket expense as ‘UK/Non-EC’ and ‘Out of Scope’ for VAT. This is because you can't reclaim non-UK VAT through your UK VAT return. If you’re unsure which VAT rate to select, please ask your accountant.

In this scenario, you’ll need to claim back the VAT through HMRC. Once you’ve reclaimed the VAT and the transaction is imported into FreeAgent, select ‘Refund’ as the transaction ‘Type’ and select the cost category where the cost of the goods was allocated to. Use the ‘Out of Scope’ option for VAT. This will ensure that it is not recorded on your UK VAT return.

Creating a bill

If you’re creating a bill instead of explaining a bank transaction or creating an out-of-pocket expense, you will need to adjust the VAT settings of each of your relevant contacts in FreeAgent before creating the bill.

Edit contact VAT settings

To do this, navigate to the ‘Contacts’ tab at the top of the screen and select ‘Edit’ next to the relevant contact.

Purchase_of_goods_12.png

Make sure that the address of the contact is outside the UK.

Purchase_of_goods_7.png

Select ‘Save Changes’ at the bottom of the screen to complete the process. For more information on how to edit a contact’s VAT settings, please see this article.

Create the bill

Navigate to the ‘Bills’ tab at the top of the screen.

Purchase_of_goods_14.png

Select ‘Add New Bill’.

Purchase_of_goods_15.png

Complete the relevant details for the bill. Select ‘0%’ from the ‘VAT’ drop-down menu and ‘EC Services’ from the ‘EC Status’ options. Please note that you won’t see these options if the bill is dated on or after 1st January 2021.

Purchase_of_services_7.png

Select ‘Create and Finish’ to complete the process. For more information on how to create a bill, please see this article.

A record of the bill being created will appear in your Audit Trail report.

Purchase_of_services_8.png

Local VAT at a rate other than 0%

However, if you’ve been charged local VAT overseas at a rate other than ‘0%’, you’ll need to record the bill as ‘UK/Non-EC’ and ‘Out of Scope’ for VAT. This is because you can't reclaim non-UK VAT through your UK VAT return. If you’re unsure which VAT rate to select, please ask your accountant.

In this scenario, you’ll need to claim back the VAT through HMRC. Once you’ve reclaimed the VAT and the transaction is imported into FreeAgent, select ‘Refund’ as the transaction ‘Type’ and select the cost category where the cost of the goods was allocated to. Use the ‘Out of Scope’ option for VAT. This will ensure that it is not recorded on your UK VAT return.

The effect on your VAT return

FreeAgent will work out the reverse charge on the services, which is the amount of VAT that you would have paid if the services had been purchased from a business based in the UK, and add this to boxes 1 and 4 of your VAT return.

The net amount of the bank transaction, out-of-pocket expense or bill, depending on how you record the purchase, will be added to boxes 6 and 7 of your VAT return.

FreeAgent accounts for the reverse charge in this way regardless of whether you're using the standard VAT scheme or the Flat Rate Scheme.

Did you find this article useful?