Tag Archives: VAT

Invoicing and VAT in the UK

In the UK and most of the EU there are rules on what must appear on a sales invoice if you are registered for VAT. Obviously those rules vary from one country to another, and you will need to check with your local inland revenue service, but there are some general rules that you should observe.

In the UK, VAT on sales is known as Output tax. That has always seemed an odd label to me since the tax is coming in to the business!, but the Inland Revenue see it one step further in that it will then go OUT from you to them.

It will come as no surprise then that VAT on purchases is called Input tax. If you are VAT registered, then you can reclaim that VAT, but this is where the rules come into play.

Simplified

In order to claim the VAT, you will need to make sure the supplier’s invoice is valid. This is the minimum it must have:

  • Valid EU VAT Number
  • Supplier’s name and address
  • Description of goods/services
  • Tax Point (date of sale)

The above is known as a simplified VAT invoice and is only valid if the supply is £250 or less. It is up to you to check the VAT rate for the items you have bought. For example, if the goods were exempt, then even though you have the VAT number you cannot claim the VAT (because there isn’t any). If in doubt always ask for a modified or full invoice (see below).

Modified

Then there is the modified invoice. The legislation says you can issue this ‘if your customer agrees’. What they mean is, if your customer doesn’t mind an invoice that shows the total VAT for each rate rather than a complete breakdown item by item.

These are the things you need to show in addition to the simplified items above:

  • VAT inclusive total for each VAT rate
  • The total VAT for each VAT rate
  • The VAT exclusive total for each VAT rate

In other words you must show the exclusive and inclusive totals plus the VAT totals for each rate of VAT included in the transaction (eg. standard, reduced and exempt).

Full Invoice

In addition to the above, a full VAT invoice must include:

  • Customer’s name and address
  • Invoice number
  • Invoice date (if different to the Tax Point – which is the actual time of supply)
  • The unit price or rate and quantity of items supplied
  • Cash discount rate or amount
  • A total for each rate (so it is obvious how much of the invoice is zero rated for example)

The Tax Point is crucial. It is the date of the time of supply and it could be different from the Invoice Date. The reason is that the VAT must be accounted for by both customer and supplier at the same rate, and that can only happen if both are using the same date.

The rules state that if you are a retailer then you do not need to issue a VAT receipt (of any type) unless you are asked to do so by the customer. If any supplier fails to issue an invoice having been asked for one, a fine or other penalty can be issued by HMRC.

DISCLAIMER: Remember, ALWAYS check with your local Inland Revenue service or tax authority. Advice issued on this website is simply advice. It is not the law and cannot be used as evidence in any legal matters. Click here for more details: HMRC Website.

VAT Early Settlement Discount

VAT Early Settlement Discount

Image by ttelyob via Flickr

In the UK, if you allow a discount for early settlement of an invoice (aka prompt payment) then the VAT is calculated on the discounted amount regardless of whether the discount is taken.

Sub Total: 10.00
VAT: 1.58
Net Total: 11.58
10% Early Settlement Discount (ESD)

So the VAT (17.5% at the time of writing) is applied to 9.00, not 10.00.

However, if the customer pays by installment, then you must account for VAT at the actual price paid.

Also, if you offer any incentive to a customer, known as an unconditional discount, then the VAT is calculated on the discounted amount provided the customer pays the discounted amount. Otherwise the VAT is calculated on the full value.

Finally there are contingent discounts. If you offer a discount on some contingency, eg. pay x amount by such and such a date, whatever happens, the VAT is calculated on what is actually paid. That of course may mean an adjustment is required in your accounts to accommodate it (eg. the discount taken).

Bear in mind that laws and regulations are subject to change so always check with UK HMRC if in doubt.

Note: it seems that this VAT rule only applies in the UK as I can find no reference to the rest of the Eurozone. Countries like the USA don’t suffer from this type of beaurocracy, but note that VAT is being talked about actively in the States as an alternative to Sales Tax…

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