Record the purchase of goods from the EU before 1st January 2021

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

To record the purchase of goods 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 how to record the purchase of goods from businesses based outside the UK.

If you buy goods from suppliers in the EU, these will not normally have UK VAT on them. However, you will still need to report them in box 9 of your VAT return and account for acquisition tax on the purchase.

Acquisition tax is what you would have paid in VAT if you'd bought those goods in the UK. It goes in box 2 of your VAT return and may also be added to box 4 so that you don't have extra UK VAT to pay.

To record the purchase of services from the EU before 1st January 2021, find out how to record the purchase of services from the EU before 1st January 2021.

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.

Navigate to ‘Settings’ from the drop-down menu at the top-right of the screen and select ‘VAT Registration’.

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.

Recording the purchase of goods from the EU

If you purchased goods 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. Before entering this data, it’s a good idea to familiarise yourself with the difference between an expense, a bill and a bank payment in FreeAgent.

Explaining a bank transaction

Navigate to the 'Banking' tab at the top of the screen and select 'Bank Accounts' from the drop-down menu.

Choose the relevant bank account from the list, click on the transaction that relates to the purchase and select ‘More options’ from the 'Adjustments' drop-down menu.

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

Select ‘EC Goods’ from the ‘EC Status’ options and select either ‘Auto’ or ‘0%’ 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.

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

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 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 an out-of-pocket expense

Navigate to the 'My Money' tab at the top of the screen and select 'Expenses' from the drop-down menu.

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

Complete the relevant details for the out-of-pocket expense. Select either ‘Auto’ or ‘0%’ from the ‘VAT’ drop-down menu and ‘EC Goods’ 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.

Select ‘Create New Expense’ to complete the process. Find out more about how to create an out-of-pocket expense.

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.

Adding a bill

If you’re adding 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 adding 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.

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

Select ‘Save Changes’ at the bottom of the screen to complete the process. Find out more about how to edit a contact’s VAT settings.

Add the bill

Navigate to the 'Bills' tab at the top of the screen.

Select ‘Add new bill’ and follow the steps for adding a bill in FreeAgent.

Complete the relevant details for the bill. Select ‘EC Goods’ 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.

When entering the details for the purchase, select either ‘Auto’ or ‘0%’ from the ‘VAT Rate’ drop-down menu.

Once you've entered the relevant details for the purchase, select ‘Save and Review’ to complete the process. Find out more about how to add a bill.

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

Not using the VAT Flat Rate Scheme

If you're not using the VAT Flat Rate Scheme, FreeAgent will work out the amount of VAT that you would have paid if the goods had been purchased from the UK and add this to boxes 2 and 4 of your VAT return.

The amount of the bank transaction, out-of-pocket expense or bill, depending on how you record the purchase, will be added to boxes 7 and 9 of your VAT return.

Using the VAT Flat Rate Scheme

If you're using the VAT Flat Rate Scheme, FreeAgent will work out the amount of VAT that you would have paid if the goods had been purchased from the UK and add this to box 2 of your VAT return only. This is because you still have to pay acquisition tax when you're on the flat rate scheme, which can’t be reclaimed.

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 7 and 9 of your VAT return.