A VAT invoice is an official document issued by a business when it sells goods or services subject to value-added tax (VAT). It records the transaction and breaks down the VAT charged. For businesses, a VAT invoice proves the VAT they’ve charged to customers. For buyers, it’s proof of the VAT they’ve paid, and it can be used to reclaim VAT from their local tax authority. Without it, both parties could face issues with compliance or lose out on tax benefits.
Below, we’ll explain what information must be included on a VAT invoice in the United Kingdom, how to calculate and display VAT on invoices, and what happens if VAT invoices are incorrect.
What’s in this article?
- What must be included on a VAT invoice in the UK?
- What are the types of VAT invoices?
- How do you calculate and display VAT on invoices?
- How to show VAT on the invoice
- What are the rules for invoicing VAT-exempt or zero-rated sales?
- What happens if VAT invoices are incorrect?
What must be included on a VAT invoice in the UK?
To meet legal requirements, a VAT invoice in the UK must include specific details, such as:
A unique invoice number
The date of issue
The date of supply (if different from the issue date)
The supplier’s business name, address, contact information, and VAT registration number
The customer’s name or trading name and address
A description of the goods or services supplied
The quantity of goods or the scope of services provided
The subtotal, excluding VAT
The VAT rate applied (e.g. 20%, 5%, 0%)
The amount of VAT charged
The total amount, including VAT
Simplified invoices (e.g. for amounts below £250) require fewer details, but you must still include the VAT rate and total amount due.
What are the types of VAT invoices?
Three main types of VAT invoices are used in the UK, each suited for different transaction types and total amounts.
Full VAT invoices: These are used for most transactions between VAT-registered businesses and must include all required details.
Simplified VAT invoices: These are used for transactions under £250 (including VAT), if the invoice does not include any exempt supplies. Simplified invoices can contain fewer details – normally just the date of supply; a description of goods or services; the VAT rate; the VAT-inclusive price; and the supplier’s name, address, and VAT number.
Modified VAT invoices: These are used for retail sales over £250 where the goods are subject to VAT, and they must include all required details.
How do you calculate and display VAT on invoices?
Assume that you’re selling a product for £100 and VAT is 20%. First, divide the VAT rate by 100. Then, multiply that number by the total amount due before VAT to get the amount of VAT due.
£100 x 0.2 = £20
Add the VAT to the subtotal to get the total price the customer owes.
£100 + £20 = £120
If you already know the VAT-inclusive price and need to work backward, divide the total by the VAT rate, plus one.
£120 ÷ 1.2 = £100
£120 - £100 = £20
If different items on the invoice have different VAT rates, follow these steps for each product or service individually, and add everything up at the end to get the final total.
How to show VAT on the invoice
Your invoice should include the following details in a clean, easy-to-read format:
The subtotal for each item or service (what they cost before VAT)
The VAT rate you’ve applied (e.g. 20%, 5%, or 0% if it’s exempt)
The total VAT amount for the entire invoice
The final total (what the customer owes, including VAT)
What are the rules for invoicing VAT-exempt or zero-rated sales?
A VAT invoice isn’t necessary if everything sold is zero-rated or exempt from VAT. Here’s what each of these terms means:
Zero-rated sales: VAT is charged at 0%. The goods or services are taxable, but no VAT is added. Examples include basic food items, books, and children’s clothing.
VAT-exempt sales: The goods or services are outside the scope of VAT. No VAT is charged or reclaimed. Examples include financial services, education, and medical treatments.
When you invoice VAT-exempt or zero-rated sales, the rules are slightly different from those for standard VAT sales. These invoices should still include the invoice date; unique invoice number; the customer’s details; and the business’s name, address, and VAT registration number. They should also include a subtotal and final price.
The invoice should then state that the sale is zero-rated or exempt: “zero-rated supply” for zero-rated sales and “exempt supply” for VAT-exempt sales. In the VAT column for zero-rated sales, state “0% VAT”. Do not include a VAT column for exempt sales.
Even though these sales don’t involve VAT, proper invoicing is important for compliance during audits. It provides a record that differentiates between zero-rated and exempt sales, which have different implications for VAT returns. These invoices also provide a helpful record for customers.
What happens if VAT invoices are incorrect?
If your VAT invoice is incorrect, it can cause problems for you and your customer. On the business side, His Majesty’s Revenue and Customs (HMRC) could see invoice errors as non-compliance and issue fines, conduct audits, or delay processing your VAT return. On the customer side, incorrect invoices mean customers might not be able to reclaim VAT on their purchases.
Here are some common mistakes to avoid on VAT invoices:
Charging the wrong VAT rate
Forgetting invoice details, such as your VAT registration number and the invoice date
Mislabelling items as zero-rated or exempt
Miscalculating the VAT amount or totals
If you discover errors in your VAT invoices, don’t edit the original invoice – HMRC does not permit this. Instead, issue a credit note to cancel the incorrect invoice. Identify the cancelled invoice by its invoice number. Then, create a new, correct invoice. Update your customer about the error and what you’re doing to resolve it as soon as possible. If the error has already gone into your VAT return, you might need to amend your filing or adjust your next return.
To avoid future errors, double-check all invoices for accuracy and completeness before they’re sent, and take the time to understand how different VAT rates apply to your business’s offerings. Additionally, consider investing in accounting software that can automate calculations to ensure mathematical accuracy.
The content in this article is for general information and education purposes only and should not be construed as legal or tax advice. Stripe does not warrant or guarantee the accuracy, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent lawyer or accountant licensed to practise in your jurisdiction for advice on your particular situation.