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.
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:
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).
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:
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).
In addition to the above, a full VAT invoice must include:
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.
This article on UK VAT last checked and updated November 2016 by Quentin Pain
If you offer a discount for early payment of your invoices, then the VAT is also discounted at the same rate.
This is a new rule that came into effect from 1st April 2015 onwards.
Full details are available on HMRC’s website in the publications section to do with (UK) VAT: https://www.gov.uk/government/publications/revenue-and-customs-brief-49-2014-vat-prompt-payment-discounts/revenue-and-customs-brief-49-2014-vat-prompt-payment-discounts
Example Invoice: If you issue an invoice for £100 + VAT (at 20%), the total is £120 with a VAT liability of £20. If on that invoice you offer a 10% discount if paid within a certain time period, then the invoice total will reduce to £90 + VAT, which makes the final total £108 (£90 + £18 VAT at 20%).
So the customer has a choice in this example: 1) pay the invoice early and pay £108 or pay it within the normal agreed period and pay £120. Either way, the VAT is properly apportioned at 20% and both the suppliers and customers books will agree.
This is of course the logical way to deal with VAT, but it wasn’t like this at all prior to April 2015, when this article originally came out.
So for posterity (and anyone who needs to resubmit earlier tax returns) I’m leaving the original article in full below.
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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
Net Total: 11.80
10% Early Settlement Discount (ESD)
So the VAT (20% in this example) is applied to 9.00, not 10.00 (hence the 1.80 and not 2.00).
However, if the customer pays by instalment, 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 (as they have – see the start of this updated article – Ed).
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 in the States as an alternative to Sales Tax.
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