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

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

To record the sale of goods 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.

Under certain circumstances you can zero-rate sales of goods outside the UK for UK VAT. Services directly related to those goods, such as delivery charges, are also counted as part of sales of goods. Please note that services which are not directly related to the goods will need to be recorded separately.

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

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 goods to the EU

If you supplied goods 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 Goods’ from the ‘EC Status’ options and select ‘0%’ from the ‘VAT’ drop-down menu if you can charge VAT at 0% for the goods you’re selling. HMRC provides guidance for checking the conditions and time limits for zero rating. If you’re unsure which VAT rate to select, please ask your accountant.

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 ‘Always’ from the ‘Charge VAT’ drop-down menu in the ‘Invoicing Options’ area. Make sure that the ‘VAT Registration Number’ field has been completed using a valid VAT number for your customer as HMRC requires this for sales of goods to the EU to be zero-rated.

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Please note that these settings are different from the ones you need if you are selling services to a customer in the EU. 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, select 'More Options' to expand the section and choose ‘EC Goods’ 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 ‘0%’ from the ‘VAT’ drop-down menu if you can charge VAT at 0% for the goods you’re selling. HMRC provides guidance for checking the conditions and time limits for zero rating. If you’re unsure which VAT rate to select, please ask your accountant.

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 net amount of the bank transaction or invoice, depending on how you recorded the sale, to boxes 6 and 8 of your VAT return.

Using the VAT Flat Rate Scheme

If you're using the VAT Flat Rate Scheme, FreeAgent will add the net amount of the bank transaction or invoice, depending on how you recorded the sale, to boxes 6 and 8 of your VAT return. It will also calculate the flat rate VAT on that sale and add it to box 1. This is because the sale of goods outside the UK is zero-rated for VAT.

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