Using a template to write invoices saves you a fair bit of time. While you still have to enter all of the payment information for each order on your own, sample invoices provide a ready-made design that you just have to fill in using the relevant company and customer data. But how does the perfect invoice template really look? And what should an invoice template consist of?
An error-free invoice is an important requirement for businesses who want to avoid legal conflicts with customers or the HMRC. Invoices are subject to strict regulation in the UK, and there are special regulations that must be applied when preparing a VAT invoice as well. We explain which components an invoice should include and which additional requirements there are for the issuance of a correct invoice.
- What is on an invoice?: Invoice requirements
- Tax regulations for small businesses
- Invoice recordkeeping
- Special rules for invoicing
- Common errors with invoice creation
What is on an invoice?: Invoice requirements
An invoice is a written document where the supplier lists the goods and/or services provided in detail and requests payment from the customer. An invoice is different than a receipt, which is just an acknowledgement of the payment – the money claim on the one hand and product liability are binding even without one. But legally speaking, it is required to have clear documentation of any claims you may want to make, and if both you and your business partner are VAT-registered businesses then you must meet those invoice requirements as well.
For a commercial document to be legally recognised as an invoice in the United Kingdom, the following mandatory specifications are made by the HMRC. The document must contain the following:
✔ Unique identification number
✔ Name and address of both seller and recipient, as well as the date of sale
✔ Detailed description of the merchandise
✔ Supply date of goods or services
✔ Price of each item of merchandise
✔ All additional charges on the merchandise (shipping, insurance, etc.)
✔ VAT amount (if applicable)
✔ Total amount owed
If both you and your business partner are VAT-registered businesses, then the invoice needs to meet VAT requirements. In addition to the regular invoice requirements, these include:
✔ VAT number
✔ Tax point (time of supply)
✔ Price per item (excluding VAT)
✔ Total amount excluding VAT
✔ Total VAT amount
✔ Item quantity and discount rate (if applicable)
✔ VAT rate charged per item
✔ Total amount including VAT
Delivery or service date
Here is where you list the date on which the delivery was received by the customer or the service was performed. For service performance dates, it’s pretty decisive - simply list the date when the service was completed. For the delivery date, you can either specify the date from the delivery note or write the expected date if the exact time hasn’t been determined yet (e.g. ‘expected delivery: 12.5.2017’).
Numbering your invoices is the best way to keep track of your records and avoid any issues with missing documentation. There are multiple methods of doing this, but all employ a sequence of consecutive numbers. The unique invoice number is used to clearly identify the invoice. Combinations of number and letters are also possible, as is including the date of service or customer number.
You can start your consecutive invoice number sequence wherever you want to. For example:
Invoice number: D-230517-P-4602
In this number, the D stands for domestic, 230517 is the invoice date (23 May 2017), and P stands for a delivery warehouse in Portsmouth. The 4602 is the consecutive invoice number, meaning that the next invoice would need to use the suffix 4603.
You can also form invoice numbers without any letters, such as the following example:
In this case, the number starts with the date (23 May 2017), the 4602 is the customer number, and the 00 suffix denotes the first invoice of that particular customer’s sequence. The next invoice for customer 4602 would have to end with 01.
Quantity and type of deliver or scope and type of service
Make sure that you include all delivered goods or all billed services individually and with a commercial description in the invoice. That way, you can simply use collective terms like “Office furniture”, “Tableware”, “Drainpipes”, etc. But terms that are too general, such as “Gift items”, aren’t sufficient descriptors. In the same line, enter the prices (total price and price per unit, if applicable).
If prepayments have been calculated, then you need to specify this separately on the invoice with the addition “Billing for service yet to be rendered”. If you already know the date that the payment will be made, you need to include this as well
Charges, tax, and tax rate
The charges (net and gross invoice), the tax amount (price plus VAT), and the tax rate (VAT rate in percent) must be listed individually in the invoice. If the customer receives a tax exemption, then the invoice also needs to indicate which delivery or service the exemption applies to. This also goes for any other reductions such as discounts, bonuses, etc.
Tax regulations for small businesses
The HMRC allows self-employed people to register as a sole trader, which must be included on the invoice. Your taxes as a sole trader are then filed via a self assessment tax return. Tax exemptions, returns, and payroll regulations are points of concern when running your own business and still attempting to meet tax obligations. Corporation Tax is self-assessed, but only paid by limited companies. VAT tax also must be tracked if your small business sells products and services. Income tax must be paid once profit goes above the personal tax allowance of £11,500 (2017). This is tracked by the HMRC according to the PAYE (Pay As You Earn) method.
As with any kind of recordkeeping, it’s recommended to hold onto any tax-related records for as long as they are applicable – if the expenses have yet to be filed or have just recently been filed, it’s a good idea to hold onto any paperwork. That way, if questions of proof arise, you will have them for reference. If you’re running a limited company, the HMRC requires records to be kept for 6 years, and you risk fines of up to £3,000 or disqualification as company director if you fail to keep proper records.
Special rules for invoicing
As it so often goes, there are exceptions when it comes to invoicing. Special cases include credit items, advance payments or partial services, as well as travel expenses. There are also special rules for invoicing outside of the UK.
Credit instead of bill
Credit is issued by the recipient. This doesn’t settle an invoice in the classic sense, where payment is collected, but instead the service provider receives a credit in the amount of the agreed price for the service rendered.
If a freelancer is working for a company for a particular amount of time, they can relieve themselves of bureaucratic expenses by not issuing an invoice for their work. Instead, they receive a credit from the company as their fee.
Here, VAT is added just like a regular invoice. The credit issued is treated just as a cash payment would be. It’s important that you identify the credit as such for the taxation authorities.
Advance payments and partial services
In general, invoices don’t have to be paid in advance. Customers are frequently given the option to divide services and pay in installments. For you as the company, it’s important that you record payments that have already been made in the final statement. Partial services must also be properly taxed.
Use the same tax rate regardless of the amount of service being billed. Partial invoices are applied in the same way as complete ones.
Travel expenses in the invoice
Whether by train or plane or bus, travel expenses can also be submitted as invoices. These are dealt with as tax exemptions by the HMRC and include the following:
✔ Travel between home and business destination
✔ Fares for taxis or other transportation between locations (e.g. airport, hotel, work location, etc.)
✔ shipping of baggage or material between locations
✔ Meals and lodging
✔ Dry cleaning and laundry
✔ Business calls while on business trip
✔ Other expenses related to business travel
Keeping good records is essential for successfully claiming any business-related travel expense deductions.
Invoicing outside the UK
When doing business with entities outside of the UK, it’s important to check the rules and regulations of the country you’re doing business with to make sure both you and your business partner are in compliance. When doing business with partners in the EU, for example, including your company’s VAT identification number is an essential component of the invoice. But with business outside of the EU, VAT isn’t charged. Check the HMRC regulations for business abroad as well as the regulations of the specific country or countries with which you are doing business.
Common errors with invoice creation
Invoicing has the potential to be absolutely riddled with errors. By submitting an incorrect or incomplete invoice with your taxes, you might be denied the right to deduct and be stuck with extra costs. These are the most common mistake that happen while invoicing that you should be sure to avoid:
Required information is missing or incorrectly entered
If you don’t take account of the requirements mentioned above when creating your invoice, then you won’t fulfill the minimum requirements and your invoices will not be accepted for taxation. Deductions aren’t issued if the necessary data is not complete and correct on the invoice. Small typing errors generally won’t deny your right to deduct, as long as they aren’t on important information. But incorrectly listing the tax identification number can lead to significant problems.
Incorrect VAT rate applied
If you specify a VAT rate that’s either too high or too low, this is a serious billing error. Always make sure that the correct information has been entered here. If, for example, you issue a tax rate that’s too high, you’ll have to pay that rate to the tax office. Your customer, though, can’t put the excessive tax rate toward their deduction.
But a tax rate that is too low also has consequences. It’s true that the company applying the tax will only have to pay that rate on their product, but it also means that the recipient can only deduct at the specified rate.
Unauthorised tax credit
Invoices that contain false data are referred to as unauthorised tax credits. If, for example, you list the expense as office improvements but instead buy a game console for your own use instead of an office computer, the extra tax must be paid. Details on types of unauthorised payments and subsequent tax charges are listed by the HMRC.
If an invoice has been drawn up without any services actually being performed or deliveries taking place, it’s called a bill. Bills are also available if the invoice issuer isn’t actually a business. In such cases, the HMRC reserves the right to refuse the invoice recipient’s request for deductions.
Always check your invoices! It is the best way to ensure that you only submit complete, compliant invoices with your taxes. This goes for paper invoices as well as electronic version.