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How FreeAgent handles the reverse charge

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.

What is the reverse charge?

If you buy services (not goods) from countries other than the UK, and you belong in the UK, then you may have to use the reverse charge mechanism to account for VAT.

When you sell a service abroad, you don’t need to account for VAT using the reverse charge. However, your customer may need to do this. Choose 'EC Services' when you create an invoice and FreeAgent will add some text to the invoice to warn your customer that they may need to use the reverse charge on their local VAT returns.

How FreeAgent handles the reverse charge for services from the EU

Here is what FreeAgent will do for you automatically when you buy services from the EU, as long as you post these costs correctly as either bills, expenses or bank payments. Remember to set the VAT rate as 0% when you enter these costs. For a service that cost £100:

  • FreeAgent will work out the VAT you would have paid on that service if you'd bought it from a VAT-registered supplier in the UK. In this case that would be £100 x 20% = £20.
  • That amount (in this case £20) will be added to box 1 on your VAT return.
  • It will also be added to box 4 on your VAT return, assuming you're entitled to claim this VAT back.
  • The net amount (in this case £100) will be added to both boxes 6 and 7 of your VAT return.

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

How FreeAgent handles the reverse charge for services from outside the EU

If you buy services from outside the EU and the service doesn't have UK VAT on it, enter the cost as a bill, expense or bank payment and tag it as 'EC Services'. This will allow FreeAgent to account for the VAT automatically.

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