Accounting

What is Invoice?

An invoice is a document requesting payment for goods or services. VAT invoices must contain specific information for VAT-registered businesses.

Example

A VAT invoice must show: your VAT number, date, unique invoice number, customer details, VAT breakdown.

Key Dates

Issue invoices promptly; keep for 6 years

How Invoice Works in Practice

An invoice is a formal document issued by a seller to a buyer requesting payment for goods or services supplied. For UK limited companies, invoices are not just payment requests - they are legal documents that form the basis of your accounting records, VAT claims, and tax compliance.

If your company is VAT-registered, you must issue VAT invoices that meet HMRC's specific requirements. A full VAT invoice must include: your company name, address, and VAT registration number; the customer's name and address; a unique sequential invoice number; the invoice date and the date of supply (if different); a description of the goods or services; the quantity and unit price; the total amount excluding VAT; the VAT rate applied to each item; the total VAT charged; and the total amount including VAT.

For invoices under £250 (including VAT), you can issue a simplified VAT invoice, which requires fewer details. You do not need to include the customer's name and address or show a line-by-line breakdown. However, you still need your VAT number, the date, a description of goods or services, and the total including VAT.

HMRC requires you to keep copies of all sales invoices for at least six years. Under Making Tax Digital, your invoicing records must be maintained digitally. The invoice is the primary evidence supporting your output VAT declarations and your customer's input VAT claims, so accuracy is essential.

Step by Step

When you supply goods or services, you issue an invoice to your customer. This creates a debtor (accounts receivable) in your books - the customer owes you money. The invoice amount excluding VAT is recognised as revenue in your profit and loss account. The VAT element is recorded as a liability to HMRC (output VAT) and reported on your next VAT return.

Your customer receives the invoice and records it as a creditor (accounts payable) in their books. If they are VAT-registered, they can reclaim the VAT shown on your invoice as input VAT on their own VAT return. This is why the accuracy of your VAT invoices matters - an incorrect invoice can prevent your customer from reclaiming VAT.

Payment terms on invoices vary but common terms in the UK are 30 days from the invoice date. Late Payment of Commercial Debts legislation entitles you to charge interest (currently 8% plus the Bank of England base rate) and compensation on late payments, though many small businesses are reluctant to enforce this with valued clients.

Practical Tips

  • Set up a consistent invoice template with all required VAT fields pre-populated so you never accidentally omit mandatory information like your VAT number
  • Use accounting software that auto-generates sequential invoice numbers to avoid gaps or duplicates that could raise questions during a VAT inspection
  • Include your payment terms, bank details, and a reference on every invoice to make it easy for customers to pay promptly
  • Send invoices on the day of supply where possible - the sooner you invoice, the sooner you get paid, and it keeps your VAT reporting clean

Common Mistakes to Avoid

  • Not using sequential invoice numbers, which can trigger questions during a VAT inspection - HMRC expects a logical numbering system with no gaps
  • Failing to show the correct VAT rate breakdown when invoicing mixed-rate supplies (e.g. standard and zero-rated items on the same invoice)
  • Issuing invoices without your VAT registration number when VAT-registered, which prevents your customer from reclaiming input VAT
  • Not issuing invoices promptly - HMRC requires you to issue a VAT invoice within 30 days of the supply for most transactions

Frequently Asked Questions

Do I need to issue VAT invoices if I am not VAT-registered?

No. If you are not VAT-registered, you should not show VAT on your invoices. You still need to issue invoices for your sales, but they should show the total amount without any VAT breakdown. Charging VAT when not registered is an offence.

How long do I need to keep invoices?

HMRC requires you to keep invoices for at least six years. If you are VAT-registered, this applies to both sales and purchase invoices. Digital copies are acceptable as long as they are legible and accessible for inspection.

Can I issue invoices in a foreign currency?

Yes, but if you are VAT-registered in the UK, you must also show the VAT amount in sterling on the invoice. Use the HMRC exchange rate for the date of supply or the rate on the invoice date. Keep a record of the exchange rate used.

What is a pro forma invoice?

A pro forma invoice is a preliminary document sent before goods are delivered or services completed. It is not a VAT invoice and cannot be used to reclaim VAT. It is typically used to confirm details or request advance payment. You must still issue a proper VAT invoice when the supply takes place.

Do electronic invoices have the same legal standing as paper invoices?

Yes. HMRC accepts electronic invoices as valid VAT invoices provided they contain all required information. Under Making Tax Digital, digital records are actually the preferred format. PDF invoices sent by email are the most common method for small businesses.

Source: HMRC VAT Notice 700/21 - Keeping VAT records; VAT guide (VAT Notice 700) Section 16 - VAT invoices

Related Terms

VAT (Value Added Tax)

VAT is a tax added to most goods and services sold in the UK. Businesses collect it from customers and pay it to HMRC, minus any VAT they've paid on business purchases.

Accounts Receivable (Debtors)

Accounts receivable is money owed to your company by customers who haven't paid their invoices yet. Also called debtors or trade debtors.

Credit Note

A credit note is issued to reduce or cancel an invoice - used for returns, overcharges, or cancellations.

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