Charging VAT on Invoices.
How and when to Charge VAT on Invoices.
UK law requires businesses with an annual turnover exceeding £85k or in any 12 month rolling period to be VAT registered, whilst businesses with less than £85k turnover do not have to register for VAT they can still apply to be VAT registered although it remains optional, so long as they are operating below the threshold.
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Value Added Tax is simply a sales tax which VAT registered companies are obliged to charge for on goods and services for every transaction regardless of whether they are charging individual consumers (B2C) or other businesses (B2B). Some companies prefer to “hide” the amount of VAT they are charging on goods and services by simply displaying the price of goods/services including (Inc) VAT, whilst other companies may prefer to display the price excluding (ex) VAT. There is no set criteria and companies are completely free to choose whichever option suits them.
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However, when it comes to invoicing customers VAT must clearly listed as a separate value which is usually displayed right before the TOTAL section. There are however 3 VAT thresholds – 0%, 5% and 20% - most goods and services in the UK tend to fall into the 20% category however there are certain goods i.e. maternity pads and children’s uniform for instance which command 0% and 5% VAT respectively. Therefore you if you are invoicing for an item which falls into either of these categories then you would not charge the standard 20% rate. For a list of items which fall in either of these thresholds please click here.
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If you are invoicing for multiple products and/or services which have different VAT thresholds on the same invoice then you must apply the correct VAT rate per item to ensure the Total VAT being charged is correct otherwise this could lead to accounting errors and penalties being administered. In order to work out how to structure your Invoices correctly use our Free Invoice Builder tool so you always charge the correct amount of VAT.
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Some businesses make the mistake of charging VAT before shipping/handling however this is incorrect and could lead to payment delays and discrepancies with VAT return submissions – it is therefore vital to understand how much VAT should be charged per invoice and at what point VAT should be added. Our Invoice Booster Builder can help you input the right VAT thresholds based on the basket of combined goods and services you are selling to avoid any delays in getting paid and VAT accounting confusion later down the line.
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How to calculate VAT:
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Should I send a VAT Invoice after goods and services have been sent?
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It is common practice to issue an invoice retrospectively after goods/services (the transaction) has been completed unless you are sending a proforma Invoice. An invoice is essentially a demand for payment, however there are different criteria depending on how long it takes you to send an invoice afterwards.
Each Invoice has a "tax point" i.e. the date on which VAT becomes due on a particular transaction and must be included on the VAT return in which that date falls. The tax point depends on several factors, such as:
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Whether the business is invoice accounting or cash accounting for VAT.
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When the goods were supplied or the services carried out.
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When the VAT Invoice was issued to the customer.
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If an invoice is for "accounting VAT" then the tax point is the same date as the VAT invoice (using the 14 day rule) whereas if a business is "cash accounting" for VAT, the tax point is the date when the money is received. "Accounting VAT" also known as "Standard accounting" is traditional practice and is what most businesses tend to use as you simply pay VAT on the invoices you raise and not when payment has been made (cash accounting). Find out more about the Cash Accounting scheme.
With standard accounting there is a general 14 day rule which applies to most businesses. For instance, if you raise an invoice within the first 14 days of delivering goods and/or services to your business customer then you simply input the date you sent the invoice regardless of if that date falls in a new month or VAT Quarter.
For example - 31st March is your 1st Quarter end and you send a product to a customer on the 25th March but you don't invoice your customer until the 2nd April (new Quarter) - you therefore use the 2nd April as your invoice date and do not back date it to the 25th March as it falls within the 14 day rule. This invoice will then be included in the second quarterly VAT return which began on the 1st April.
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However if a business is raising a VAT invoice 14 days after goods and/or services have been supplied to the customer then the tax point will be backdated to the day on which the goods/services were supplied even if the date on which you raise the invoice falls into a new month and/or VAT quarter
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For Example Mr Smith (the bycycle maker) has to adhere to quarterly VAT submissions which fall on the:
31st March (1st Quarter end)
30th June (2nd Quarter end)
30th September (3rd Quarter end), and
31st December (4th Quarter end) each year.
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On the 1st of December Mr Smith completes a spectacular bicycle for a well deserving customer however the following day he decides to take a well earned skiing winter break and does not return until January 1st upon which he remembers to invoice his customer for the bicycle originally sent to his customer on the 1st of December.
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As Mr Smith has gone over the '14 day rule' and entered into a new VAT quarter he must backdate the tax point and date the invoice using the original date in which the bicycle were supplied to the customer i.e. 1st December. Therefore he must include this invoice, and the VAT it contains, on his VAT return for the quarter ended 31st December (4th Quarter).
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What date should I include on my Invoice if my customer pays before I raised an Invoice?
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The usual practice is to send an Invoice for goods and/or services after the transaction is completed (unless you are sending a proforma) but before your business has been paid as it is essentially a demand for payment. If a customer pays you in full before you have raised an invoice it is not ideal and essentially creates a Tax Point i.e. the date at which VAT is liable which supersedes any invoice VAT accounting schemes.
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Therefore regardless of whether the invoice was issued within the "14 day rule" or after payment was made then you would need to include the "Tax Point" date on the invoice so it is filed within the correct VAT quarter. You would then need to issue a receipt for payment which is separate to a VAT Invoice.
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