VAT is a self-assessment tax as the tax authority depends on the VAT registered businesses to collect VAT from its customers on its behalf and remit the VAT via regular VAT Return submissions.
As VAT is a self-assessment tax, the tax authority needs a way of monitoring and evidencing the sales and purchases that are subject to VAT. The way tax authorities monitor this is through the preparation and issuing of VAT invoices. It follows that VAT invoices are a crucial part of the smooth functioning of the VAT system.
Preparing and issuing proper VAT invoices is vital for the tax authority because:
- all VATable transactions need to be properly evidenced and documented by the business so that the tax authority can perform their routine VAT audits, and
- accurate invoicing records are kept enabling an auditable trail that demonstrates the accuracy of VAT Returns and payments submitted to the tax authority.
There are also some very good practical and commercial reasons to prepare and issue compliant VAT invoices, such as:
- if you issue non-compliant VAT invoices to customers, they may not pay you because they’ll need to retain that invoice for reclaiming the VAT charged to them,
- issuing non-compliant or incorrect VAT invoices can incur penalties from the tax authority, and
- errors in invoicing of goods/services sold can affect VAT Return reporting which can negatively affect cash flow and accuracy of accounting records.
We’ve covered why it is important to issue compliant VAT invoices, so how do you create a proper VAT invoice?
The EU Invoicing rules (the EU Invoicing Directives to be specific) sets out that the following details must be included for an invoice to be a compliant VAT invoice:
- The date of issuing the invoice
- A sequential number identifying the invoice
- The supplier’s VAT number
- The customer’s VAT number where the sales is subject to the reverse charge where the customer must self-assess the VAT
- The supplier’s name and address
- The customer’s name and address
- The quantity and description of goods or services supplied
- The unit price for the goods or services, exclusive of VAT
- Any discounts or rebates that are not included in the unit price
- The full net amount, split by VAT rate/exemption category
- The VAT rate(s) applied
- The VAT amount (in Pounds Sterling)
There are additional rules for providing more, and sometimes less, detail for specific types of sales and purchases, and these will be covered in our later VAT blog pieces.
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