Record the purchase of services from businesses based outside the UK

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

Please note that it’s important to follow HMRC’s guidance when recording the purchase of services 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.

For information on how to record the purchase of goods 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.

Recording the purchase of services from businesses outside the UK

If you purchase services 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. 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

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 ‘Reverse Charge’ from the ‘VAT Options’ and ‘Auto’ from the ‘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.

Select ‘EC Services’ from the ‘VAT Options’ list if you need to apply the reverse charge to your purchase, otherwise select ‘UK VAT Rates’ if you don’t need to apply the reverse charge. Then, select ‘Auto’ from the ‘VAT’ drop-down menu.

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 adding 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 ‘Auto’ from the ‘VAT’ drop-down menu and ‘Reverse Charge’ 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, select ‘Auto’ from the ‘VAT’ drop-down menu. Select ‘EC Services’ from the ‘VAT Options’ list if you need to apply the reverse charge to your purchase, otherwise select ‘UK VAT Rates’ if you don’t need to apply the reverse charge.

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 ‘Reverse Charge’ 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, select ‘EC Services’ from the ‘VAT Options’ list if you need to apply the reverse charge to your purchase, otherwise select ‘UK VAT Rates’ if you don’t need to apply the reverse charge.

When entering the details for the purchase, select 'Auto' 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 create a bill.

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

The effect on your VAT return

FreeAgent will work out the reverse charge on the services, which is the amount of VAT that you would have paid if the services had been purchased from a business based in the UK, and add this to boxes 1 and 4 of your VAT return.

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 6 and 7 of your VAT return.

FreeAgent accounts for the reverse charge in this way regardless of whether you're using the standard VAT scheme or the Flat Rate Scheme.