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How to record the purchase of goods from businesses based outside the UK

This article explains how UK VAT-registered businesses should record the purchase of goods from businesses based anywhere outside the UK from 1st January 2021.

To record the purchase of goods from a business based in an EU country where the purchase was dated on or before the end of the Brexit transition period on 31st December 2020, please follow the guidance in this article.

Please note that it’s important to follow HMRC’s guidance when recording the purchase of goods from businesses based outside the UK in order to prepare your VAT returns correctly. If you’re unsure how to record these, please speak to your accountant.

You’ll need full (level 8) access to your FreeAgent account to follow the steps below to record the purchase and then post journal entries to record the import VAT (if your business is based in England, Scotland or Wales).

For information on how to record the purchase of services from businesses based outside the UK from 1st January 2021, please see this article.

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.

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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1. Recording the purchase of goods from businesses outside the UK

If you purchase goods from businesses outside the UK, 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. For information on the difference between an expense, a bill and a bank payment in FreeAgent, please see this article.

Explaining a bank transaction

If you’re explaining a bank transaction instead of creating an out-of-pocket expense or bill, 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 purchase and select ‘More Options’.

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Businesses based in England, Scotland or Wales

If your business is based in England, Scotland or Wales, select ‘Payment’ from the ‘Type’ drop-down menu. If your business is based in Northern Ireland, please see the section below.

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Select ‘UK VAT Rates’ from the ‘VAT Options’ and select the ‘0%’ from the ‘Including [X] VAT’ drop-down menu. Please note that you won’t see these options if the bank transaction is dated before 1st January 2021.

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

Businesses based in Northern Ireland

If your business is based in Northern Ireland, select ‘Payment’ from the ‘Type’ drop-down menu.

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If your purchase was from the EU, select ‘EC Goods’ from the ‘EC Status’ options and select ‘0%’ from the ‘VAT’ drop-down menu. Otherwise, select ‘UK/Non-EC’.

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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 out-of-pocket expense

If the purchase was paid for using personal funds and you’re creating an out-of-pocket expense instead of explaining a bank transaction or creating a bill, navigate to the ‘My Money’ tab at the screen and select ‘Expenses’ from the drop-down menu.

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

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Complete the relevant details for the out-of-pocket expense. If your business is based in England, Scotland or Wales, select ‘0%’ from the ‘VAT’ drop-down menu and ‘UK VAT Rates’ from the ‘VAT Options’. Please note that you won’t see these options if the out-of-pocket expense is dated before 1st January 2021.

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If your business is based in Northern Ireland and your purchase is from the EU, select ‘0%’ from the ‘VAT’ drop-down menu and ‘EC Goods’ from the ‘EC Status’ options. Otherwise, select ‘UK/Non-EC’.

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Once you’ve selected the relevant option, select ‘Create New Expense’ to complete the process. For more information on how to create an out-of-pocket expense, please see this article.

A record of the out-of-pocket expense being created will appear in your Audit Trail report.

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Creating a bill

If you’re creating 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 creating 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.

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

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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 bill

Navigate to the ‘Bills’ tab at the top of the screen.

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Select ‘Add New Bill’.

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Complete the relevant details for the bill. If your business is based in England, Scotland or Wales, select ‘0%’ from the ‘VAT’ drop-down menu and ‘UK VAT Rates’ from the ‘VAT Options’. Please note that you won’t see these options if the bill is dated before 1st January 2021.

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If your business is based in Northern Ireland and your purchase is from the EU, select ‘0%’ from the ‘VAT’ drop-down menu and ‘EC Goods’ from the ‘EC Status’ options. Otherwise, select ‘UK/Non-EC’.

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Once you’ve selected the relevant option, select ‘Create and Finish’ to complete the process. For more information on how to create a bill, please see this article.

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

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2. Posting journal entries to record import VAT

Once you’ve recorded the purchase, you’ll need to post journal entries to record the import VAT if your business is based in England, Scotland or Wales. Please note that if your business is based in Northern Ireland you don’t need to post journal entries.

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 the following journal entries:

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

£X is the amount of UK VAT that would be payable and reclaimable on the purchase. 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 period in which the VAT effect of the transaction should take place.

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 the following journal entries:

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

£X is the amount of UK VAT that's due on this import (the gross value of the goods multiplied by your Flat Rate Scheme’s percentage).

When dating the journal entries, you should choose a date that falls within the VAT period 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.

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

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