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How to record sales and purchase transactions with businesses based outside the UK from 1st January 2021

This article explains how VAT-registered businesses should record sales and purchase transactions with businesses based anywhere outside the UK from 1st January 2021.

Please note that following the process outlined below is necessary for preparing and submitting your VAT returns successfully. Failing to follow these steps from 1st January 2021 onwards could result in errors appearing on your VAT return.

Recording sales transactions with businesses outside the UK

Recording the supply of goods

If you supply goods to businesses outside the UK, record the transaction by either explaining a bank transaction as a ‘Sale’ or creating an invoice.

Select the appropriate VAT option for your business

When following either of these processes, you will be prompted to select an option from the ‘VAT Options’ menu:

  • If your business is based in England, Scotland or Wales, select ‘UK VAT Rates’ to record the supply of goods to any country anywhere outside the UK.
  • If your business is based in Northern Ireland and your supply is within the EU, select ‘EC Goods’. Otherwise, select ‘UK VAT Rates’.

Select a VAT rate

When following either of these processes, you will also be prompted to select a rate of VAT for the transaction. HMRC advises business owners to find out whether they can charge VAT at 0% for the goods in question by checking the conditions and time limits for zero rating.

Recording the supply of services

Explaining a bank transaction

If you’re recording the supply of services to businesses anywhere outside the UK by explaining a bank transaction as a ‘Sale’, choose the following options: 

If your business is based in England, Scotland or Wales:

  • Select ‘Reverse Charge’ from the ‘VAT Options’ menu. You need to do this because your customer will need to account for VAT under the reverse charge process.
  • Choose ‘Out of Scope’ from the VAT rate drop-down menu.

If your business is based in Northern Ireland:

  • Select ‘EC Services’ from the VAT Options menu if your customer is in the EC. Otherwise, select ‘UK / Non/EC’.
  • Choose the appropriate VAT rate from the drop-down menu.

Creating an invoice

If you’re recording the supply of services to businesses outside the UK by creating an invoice, you will need to adjust the settings of each of your relevant contacts in FreeAgent by following these steps:

  • Navigate to the ‘Contacts’ area of FreeAgent at the top of the screen and select the ‘Edit’ button displayed on the relevant contact card. 
  • Make sure that the address of the contact is outside the UK and then choose ‘Never’ from the ‘Charge VAT’ drop-down menu in the ‘Invoicing Options’ area.

When you create the individual invoice, select 'Reverse Charge' from the 'VAT Options' list if your business is based in England, Scotland or Wales.

If your business is based in Northern Ireland:

  • Choose ‘EC Services’ if your customer is in the EC, you want the reverse charge wording to appear on your invoice and you want this invoice to appear on your EC Sales List.
  • Otherwise, choose ‘UK / Non-EC’ and edit the invoice to add any extra text that you need to include.

Recording purchase transactions with businesses outside the UK

Recording the purchase of goods

If you purchase goods from a business anywhere outside the UK, you will record the transaction by creating either an out-of-pocket expense or bill or by explaining a bank transaction as a ‘Payment’. For any of these processes, follow the steps outlined below:

Select the appropriate VAT option for your business

You will be prompted to select an option from the ‘VAT Options’ menu:

  • If your business is based in England, Scotland or Wales, select ‘UK VAT Rates’.
  • If your business is based in Northern Ireland and your purchase was from the EU, select ‘EC Goods’. Otherwise, select ‘UK VAT Rates’.

Select a VAT rate of 0%

You will also be prompted to select a rate of VAT for the transaction. Select ‘0%’ from the drop-down menu.

Post journal entries

If you're not using the VAT Flat Rate Scheme

If you're not using the VAT Flat Rate Scheme and your business is based in England, Scotland or Wales, you will need to post journal entries for the import VAT once you've finished recording the transaction.

The journal entries you should post are shown below. £X is the amount of UK VAT that would be payable and reclaimable on the purchase.

  • Credit 819 VAT Charged £X
  • Debit 818 VAT Reclaimed £X

The amount of import VAT will be available on your online statement. You can also calculate it manually by using HMRC’s guidance on the VAT rates of different goods and services.

When dating the journal entries, you should choose a date that falls within the VAT quarter in which the VAT effect of the transaction should take place.

If you're using the VAT Flat Rate Scheme

If you're using the VAT Flat Rate Scheme and your business is based in England, Scotland or Wales, you will need to post journal entries for the import VAT once you've finished recording the transaction.

The journal entries you should post are shown below. £X is the amount of UK VAT that's due on this import after including it in your Flat Rate Scheme turnover calculation (the gross value of the goods multiplied by your Flat Rate Scheme’s percentage).

  • Credit 819 VAT Charged £X
  • Debit 055 Flat Rate Scheme Surplus £X

When dating the journal entries, you should choose a date that falls within the VAT quarter in which the VAT effect of the transaction should take place.

You will also need to adjust box 6 of your VAT return to include the value of the goods. For more information, take a look at HMRC's guidance on submitting your VAT return.

Recording the purchase of services

If you purchase services from a business outside the UK, you will record the transaction by creating either an out-of-pocket expense or bill or by explaining a bank transaction as a ‘Payment’. For any of these processes, follow the steps outlined below:

Select a VAT rate of ‘Auto’

When you follow any of these processes, you will be prompted to select a rate of VAT for the transaction. Select ‘Auto’ from the drop-down menu and then finish the recording transaction.

Select the appropriate VAT option for your business

If your business is based in England, Scotland or Wales, select ‘Reverse Charge’.

If your business is based in Northern Ireland and you need to apply the reverse charge to the purchase, select 'EC Services'. Select ‘UK/Non/EC’ if your business is based in Northern Ireland and you don't need to apply the reverse charge to the purchase.

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