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

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

To record the sale of services to 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.

The steps below apply to services that are not directly related to the sale of goods. For example, if you're shipping cameras overseas, the cost of the shipping is directly related to the goods (the cameras), so the cost of the shipping is treated as a sale of goods rather than a sale of services. For information on how to record the sale of goods to the EU before 1st January 2021, please see this article.

If you are selling digital services to end consumers in the EU, you may have to report these separately under VAT MOSS. Please see this article for more details.

Enabling VAT rates for trade outside the UK

Before you can record sales 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’.

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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.

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Recording the sale of services to the EU

If you supplied services to a business based in the EU, record the sale by either explaining a bank transaction as a ‘Sale’ or creating an invoice. Please note that doing both will result in your income being double-counted.

Explaining a bank transaction

If you’re explaining a bank transaction instead of creating an invoice, 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 bank account from the list.

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

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

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Select ‘EC Services’ from the ‘EC Status’ options and select ‘Out of Scope’ from the ‘VAT’ drop-down menu. This is because the sale would almost certainly be outside the scope of UK VAT according to HMRC's rules on the place of supply. Please note that you won’t see these options if the bank transaction is dated on or after 1st January 2021.

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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.

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Creating an invoice

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

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.

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Make sure that the address of the contact is outside the UK and then choose ‘Only if contact is based in the United Kingdom' or 'Never' from the ‘Charge VAT’ drop-down menu in the ‘Invoicing Options’ area. This will enable you to record the sale as outside the scope of UK VAT.

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Please note that these settings are different from the ones you need if you are selling goods to a customer in the EU, so if you are selling both goods and services not related to those goods, you'll need to set up two different contacts for the same customer in FreeAgent.

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 invoice

Next, 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’.

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Complete the relevant details for the invoice and select 'More Options' to expand the section and choose ‘EC Services’ from the ‘EC Status’ options. Please note that you won’t see these options if the invoice is dated on or after 1st January 2021.

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Select ‘Create New Invoice’ to complete the process. For more information on how to create an invoice, please see this article.

Adding line items

When adding line items to your invoice, make sure to select ‘Out of Scope’ from the ‘VAT’ drop-down menu if the sale is outside the scope of UK VAT according to HMRC's rules on the place of supply.

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

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The effect on your VAT return

Not using the VAT Flat Rate Scheme

If you're not using the VAT Flat Rate Scheme, FreeAgent will add the amount of the bank transaction or invoice, depending on how you recorded the sale, to box 6 of your VAT return. This applies even though sales of EC services are outside the scope of UK VAT because HMRC specifies in paragraphs 3.7 and 4.1 that sales of services to the EC go in box 6 unless you are on the flat rate scheme.

Using the VAT Flat Rate Scheme

If you're using the VAT Flat Rate Scheme, FreeAgent will add the amount of the bank transaction or invoice, depending on how you recorded the sale, to box 6 of your VAT return but won’t calculate the flat rate VAT on that sale. This is because HMRC specifies that these sales should be reported in box 6 but not be part of your flat rate turnover.

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