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, unless you have opted not to use postponed accounting for VAT.
Import VAT certificate (C79)
During the Brexit transition period, each UK business would likely have paid import VAT separately from the VAT return. You may be able to reclaim this import VAT if you have collected an import VAT certificate (C79). This may sometimes still be the case even after Brexit was finalised.
To reclaim import VAT from a form C79 when explaining a bank transaction, select ‘Payment’ as the transaction ‘Type’ and select the category that the original goods purchase transaction was explained to. When entering the VAT, choose ‘Amount’ from the drop-down menu and enter the amount of import VAT the business can reclaim. If you’re unsure how much VAT your business can reclaim, please speak to your accountant.
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.
If you don't have a form C79, you’ll need full (level 8) access to your FreeAgent account to follow the steps below to record the purchase and then create 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’.
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.
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. 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
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.
Choose the relevant bank account from the list.
Select the transaction that relates to the purchase and select ‘More Options’.
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.
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.
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.
If your purchase was from the EU, select ‘EC Goods’ from the ‘VAT Options’ list and select ‘0%’ from the ‘VAT’ drop-down menu. Otherwise, select ‘UK VAT Rates’.
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.
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.
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. 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.
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 ‘VAT Options’ list. Otherwise, select ‘UK VAT Rates’.
Once you’ve selected the relevant option, select ‘Create New Expense’ to complete the process. Find out more about how to create an out-of-pocket expense.
A record of the out-of-pocket expense being created will appear in your Audit Trail report.
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. If your business is based in England, Scotland or Wales, select ‘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.
If your business is based in Northern Ireland and your purchase is from the EU, select ‘EC Goods’ from the ‘VAT Options’ list. Otherwise, select ‘UK VAT Rates’.
When entering the details for the purchase, select ‘0%’ from the ‘VAT Rate’ drop-down menu.
Once you’ve entered the relevant details, select ‘Save and Review’ to complete the process. Find out more about how to add a bill.
A record of the bill being created will appear in your Audit Trail report.
2. Creating journal entries to record postponed import VAT
Once you’ve recorded the purchase, you’ll need to create 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 create 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 create 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 create the following journal entries:
- Credit ‘819 VAT Charged’ £X
- Debit the category where you posted the purchase £X
£X is the amount of UK VAT that would be payable 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.
As your business is using the VAT Flat Rate Scheme, you would not be entitled to reclaim VAT on the purchase unless it is a single purchase of capital assets worth over £2,000. If this applies, then you would need to create the journal entries as if you were not using the VAT Flat Rate Scheme.
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 7 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.
The effect on your VAT return
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, once the journal is posted, FreeAgent will add the value of the journal, which is the amount of VAT that you would have paid if the goods had been purchased from the UK, to boxes 1 and 4 of your VAT return. For companies based in Northern Ireland, the VAT amount will be added to boxes 2 and 4.
The value of the goods will be added to box 7 of your VAT return for businesses based in England, Scotland or Wales. For companies based in Northern Ireland, the value of the goods will be added to boxes 7 and 9.
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, once the journal is posted, FreeAgent will add the value of the journal, which is the amount of VAT that you would have paid if the goods had been purchased from the UK, to box 1 of your VAT return only.
This is because you still have to pay acquisition tax when you're on the Flat Rate Scheme and that can’t be reclaimed. The exception to this is a capital asset worth more than £2,000, in which case the VAT value will be added to boxes 1 and 4 of your VAT return. For companies based in Northern Ireland, the VAT amount will be added to box 2 rather than box 1.
The net amount of the bank transaction, out-of-pocket expense or bill, depending on how you record the purchase, will be added to box 7 of your VAT return if your business is based in England, Scotland or Wales. For companies based in Northern Ireland, the net amount will be added to boxes 7 and 9.