Invoices and VAT: how to set up your documents correctly

Quite often in my job, designing office solutions for various companies, we’re asked to revise part of an existing system that produces invoices.

It never ceases to amaze me how often we have to tell the person concerned that their existing invoice system isn’t fit for purpose, or even that it’s downright illegal.

It doesn’t matter whether you produce your invoices in Word, Excel or a bespoke database system, there are legal requirements – particularly surrounding VAT – which you have to comply with, and if you fail to follow the letter of the law you may be fined or even face a spell in jail.

All VAT invoices must show:

A unique invoice number (ever increasing and an unbroken sequence -spoiled or cancelled invoices must be kept);

The seller’s name (or trading name) and address;

The seller’s VAT registration number;

The invoice date;

The date of sale (the tax point), if different to the invoice date;

The customer’s name and address (if known);

The rate of any discount;

The total amount of VAT charged.

For each item on the invoice, it must show:

A description of the goods supplied;

The unit price of the item;

The quantity supplied;

The total amount payable, excluding VAT;

The rate of VAT that applies to that item.

Adding any other information, such as the subtotal amount for each line including VAT, or the invoice total with and without VAT, is optional but probably a good idea.

Retail sales of less than £250 can use the rules applying to a simplified VAT invoice, which leave out the obligation to include the customer’s name and address and reduces the line data to show the total including VAT and the VAT rate applicable to each item.

Another alternative format is called the modified VAT invoice: this doesn’t show the VAT rate on each line, but lists all the different VAT rates separately and gives the total charged at each rate.

There are three main rates of VAT (Standard, Reduced and Zero) applicable in the UK, although it becomes a bit more complicated than that.

Although the Exempt and Non-VATable categories have the same effective rate “0%” as the Zero category, goods and services supplied in these categories must be reported separately: they can’t all be lumped together, since they’re treated differently on both your VAT return and those of your customers.

Don’t forget that VAT rates can and do change, and the rate that applies is the current rate for the category on the date of the sale (the tax point), not necessarily on the date the invoice was raised, which could be up to 30 days later. (And yes, officially there’s a time limit: your invoices must be dated within 30 days of the sale to allow the customer to reclaim the VAT in a timely manner.)

Pro forma mistakes

If you need to receive the money from your customer before you’ve actually manufactured or shipped the goods, or provided the service, you might send them a document called a “pro forma invoice”.

A common mistake is to just use the same form as your standard invoice, but stamp, write or print “pro forma” on it.

This breaks the rules – a pro forma invoice is not a VAT invoice since the sale hasn’t yet taken place: a pro forma should have a number taken from a separate sequence from your normal invoice numbers; it must state “This is NOT a VAT invoice”; it shouldn’t show your VAT registration number; it can show VAT rates and amounts, but it must make clear that these are for information only and may be affected by rate changes.