It’s not always easy to know whether to explain costs as 'EC Goods' or 'EC Services' in FreeAgent. This guide will help you.
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.
Purchases that qualify as 'EC Goods'
When you’re running a UK business that is registered for UK VAT, you may buy goods from other businesses which are based in the wider EU. These goods count as ‘EC Goods’ if all of the following apply:
- You run a UK VAT-registered business, based in the UK
- You buy goods to use in your business from another business which is based in the wider EU
- The goods are physically shipped to you in the UK
For example, if you sell perfume, you might buy some stock from a French perfume maker. Or if you are buying equipment for your office, you might purchase some stationery from a supplier based in Germany. Remember that you can only categorise these costs as ‘EC Goods’ in FreeAgent if these goods are physically shipped to you in the UK.
Purchases that qualify as ‘EC Services’
When you’re running a UK business that is registered for UK VAT, you may buy services from other businesses which are based in the wider EU. This purchase counts as ‘EC Services’.
For example, you pay a monthly subscription to an online software service produced by a company based in France. Assuming that you’re a VAT-registered UK business, you would tag this cost as ‘EC Services’ in FreeAgent.
Watch out - travel expenses you incur on EU business trips may not count!
Just because you have incurred an expense in the EU doesn’t mean that it automatically counts as either EC goods or services. For example, if you travel to the wider EU on business, you might incur costs - such as accommodation - on which you pay local VAT. Because these costs are neither goods that are shipped to the UK nor services that are received in the UK, they would not meet the EC goods and services criteria.
When you incur costs that do not meet all the criteria for EC Goods or EC Services outlined above, you should tag them as ‘non-EC’ in FreeAgent. Remember to choose 0% for the VAT rate because you can’t reclaim the local VAT through your normal UK VAT return. Instead, you should make a separate claim to HMRC to reclaim that VAT - here are the details.
When you get that money back from HMRC, explain it in FreeAgent as a refund to whichever category you put the original cost transaction to. For example, if the original cost transaction was a payment for Accommodation and Meals for hotel accommodation at a Spanish conference, you would explain the money back from HMRC for the Spanish VAT as a refund to Accommodation and Meals. Don’t forget to set the VAT rate for the refund as 0% too.