This article, first published on the FreeAgent website, 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 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 EC status for your business
When following either of these processes, you will be prompted to select an option from the ‘EC Status’ menu:
If your business is based in England, Scotland or Wales, select ‘UK/Non-EC’ 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/Non-EC’.
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
Please note that the guidance below applies to all VAT-registered businesses based in England, Scotland, Wales and Northern Ireland.
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:
Select ‘Reverse Charge’ from the ‘EC Status’ menu. This is 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.
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 'EC Status' options.
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 ‘Purchase’. For any of these processes, follow the steps outlined below:
Select the appropriate EC status for your business
You will be prompted to select an option from the ‘EC Status’ menu:
If your business is based in England, Scotland or Wales, select ‘UK/Non-EC’ from the ‘EC Status’ menu to record the purchase of goods from any country outside the UK.
If your business is based in Northern Ireland and your purchase was from the EU, select ‘EC Goods’. Otherwise, select ‘UK/Non-EC’.
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
Once you’ve finished recording the transaction, you will need to post journal entries as shown below if you’re not using the VAT Flat Rate Scheme. £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
HMRC is yet to provide information on the journal entries that you should post if you're using the VAT Flat Rate Scheme. We will update this article when the information becomes available but in the meantime, an accountant should be able to provide you with some guidance.
Recording the purchase of services
Please note that the guidance below applies to VAT-registered businesses based in England, Scotland, Wales and Northern Ireland.
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 ‘Purchase’. 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 EC status for your business
Select ‘Reverse Charge’ from the EC status menu when you create the bill or explain the bank transaction.