Countries around the world including those in the European Union (EU) and China use value-added tax (VAT), with rates ranging from 4.5% to 27.0%. Businesses must issue VAT invoices when VAT applies to their goods or services, and they must do so correctly to avoid problems with customers or compliance. Whether you’re handling international sales, managing different VAT rates, or just trying to stay compliant, there are a few basic principles to remember about VAT invoices.
Below, we’ll explain what a VAT invoice is, what’s included, common pitfalls, and best practices for handling VAT across borders.
What’s in this article?
- What is a VAT invoice?
- When do you need a VAT invoice?
- What information should be included on a VAT invoice?
- How to format a VAT invoice for compliance
- How to issue VAT invoices for international transactions
- What are common mistakes to avoid on a VAT invoice?
What is a VAT invoice?
A VAT invoice is a bill that businesses issue when they’re registered for VAT. It’s a detailed record of what was sold and the VAT amount that was charged, and it serves as a necessary document for VAT reporting. Registered businesses must create VAT invoices to track their tax obligations. Customers must acquire VAT invoices if they want to claim back VAT on their purchases.
When do you need a VAT invoice?
VAT invoices are required when VAT is charged on a transaction between businesses or between a business and a customer who wants to claim back the VAT they paid on a purchase. Here are a few relevant scenarios:
One VAT-registered business sells taxable goods or services to another. The seller must issue a VAT invoice for their records, and the customer needs an invoice to reclaim VAT on their purchase.
A VAT-registered business from one EU country sells goods or services to a customer in another EU country. VAT invoices are required for most business-to-business (B2B) transactions of this nature and certain business-to-consumer (B2C) transactions, particularly for high-ticket items that require their own means of transport.
What information should be included on a VAT invoice?
If you’re issuing a simpler VAT invoice (typically for sales under a certain threshold), you might need only the important details—the seller’s name and VAT number, the items or services sold, the invoice date, the VAT rate, and the VAT-inclusive price. Otherwise, a proper VAT invoice must include:
Supplier information: The supplier’s business name, address, and VAT registration number
Invoice number: A unique, sequential number that identifies the invoice
Invoice date: The date the invoice is issued
Customer information: The customer’s business name, address, and VAT registration number (if applicable)
Description of goods or services: Details of what was provided, including quantities and itemized costs
Total (net) amount: The total cost of goods or services before VAT is applied
VAT rate and amount: The VAT rate applied to each item or service (e.g., 20%, 5%) and the corresponding VAT amount for each
Total amount payable (including VAT): The grand total with VAT included
How to format a VAT invoice for compliance
Your VAT invoice should be arranged in a way that clearly displays the information your customer and tax authorities need. Here are tips on how to format this document:
Header information
Include your business logo, a title that marks the document as a VAT invoice, the invoice number, and the date of issue in your invoice header.
Your business information
List your business name, address, and VAT registration number directly below the header.
Customer details
Below that, include your customer’s business name, address, and VAT registration number, if applicable.
Itemized list of goods or services
Next, include an itemized list of the goods and services provided, including the quantity, unit price, and subtotal for each item.
VAT details
Beside each item, specify the VAT rate and the total line amount.
Totals section
At the bottom of your invoice, include a subtotal (the total before VAT) and the total amount due.
Additional notes (if applicable)
Below the total amount, you can include any additional information such as the due date and payment options. You can add a note explaining anything else, such as VAT reverse charges.
Sample layout
[Your business logo]
VAT invoice
Invoice no.: 12345
Date: DD/MM/YYYY
Your business information
Business name
Address
VAT registration number
Customer information
Customer business name
Customer address
Customer VAT registration number
Goods and services breakdown
Description
|
Quantity
|
Unit Price (Net)
|
Total (Net)
|
VAT Rate
|
VAT Amount
|
---|---|---|---|---|---|
Product A | 10 | $10.00 | $100.00 | 20% | $20.00 |
Service B | 5 hrs | $50.00 | $250.00 | 20% | $50.00 |
Totals
Net Total: $350.00
VAT Total: $70.00
Grand Total (Including VAT): $420.00
How to issue VAT invoices for international transactions
Issuing VAT invoices for international transactions requires adjustments based on where the customer and seller are located. Here are some considerations for handling VAT invoices for international transactions:
Currency: Specify the currency used in the transaction.
Exchange rate: Include the exchange rate, particularly if you’re filing in a different currency.
Shipping terms: Define shipping terms, and specify who bears costs and risks in cross-border goods sales.
Proof of export: Some jurisdictions don’t charge VAT on exports (e.g., EU VAT rules don’t apply to goods exported from the EU). Retain documentation of shipping for exported goods because tax authorities might ask for proof that the goods left the country.
Digital goods and services: Depending on local regulations, you might have to register and charge VAT in the customer’s country for digital goods and services.
Reverse charge mechanism: If you’re selling to a VAT-registered business in another country, you might need to apply the reverse charge mechanism. This means you don’t charge VAT; the customer accounts for it in their country.
What are common mistakes to avoid on a VAT invoice?
When you issue VAT invoices, double-check them and use reliable invoicing software such as Stripe Invoicing to minimize common errors. Here’s an overview of mistakes to watch for:
Skipping required details: VAT invoices need to include specific information. Leaving out any important details can invalidate the invoice.
Applying the wrong VAT rate: Applying the wrong VAT rate is a frequent error. Ensure you use the correct rate for the type of goods or services provided and the destination country, if it’s an international transaction.
Using the wrong VAT number: You must include the VAT registration number for the supplier and, in certain cases, the customer. This is especially important for cross-border transactions within the EU. Double-check that these numbers are accurate and up-to-date.
Making calculation errors: Miscalculations on VAT amounts can happen, especially when you work with varying rates. Recheck your math or use accounting software for accuracy.
Not separating VAT amounts: You should clearly state the VAT amount separately from the total amount. Failure to do so can make the invoice noncompliant and difficult for clients to process.
Using the incorrect currency: For cross-border transactions, VAT invoices often need to show amounts in the local currency or at an agreed exchange rate. Verify the currency requirements to avoid discrepancies.
Omitting payment terms: Though they’re not always legally required, payment terms clarify expectations for both parties and help prevent disputes. Including terms for VAT payments is also helpful for the client’s records.
Using the incorrect date format: Using the wrong date format can lead to misunderstandings, especially in international contexts. Use a clear, consistent format to ensure accurate bookkeeping.
Not including exemptions or zero-rated items: If there are items on the invoice that are zero-rated or exempt from VAT, you should identify them to ensure everything is clear.
Issuing an invoice when payment isn’t due: For certain VAT schemes (such as the United Kingdom’s Cash Accounting Scheme), VAT is due based on when payment is received, not when the invoice is issued. Prematurely issuing an invoice can create complications.
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 accurateness, completeness, adequacy, or currency of the information in the article. You should seek the advice of a competent attorney or accountant licensed to practice in your jurisdiction for advice on your particular situation.