Invoices are legal, financial documents that create a binding agreement between you and your client or customer that obliges them to pay the price you have both agreed and is clear on your invoice.
There are many different types of professional invoice that are used in different circumstances and must be kept and logged for tax purposes. For example, if you run a VAT registered business, you must submit all of your invoices to HMRC at the end of the tax year for assessment.
So how do you create an invoice? What do they look like? And what must they include?
We are going to take a look at how to make a simple invoice, what information they need, who they are for, and why you need them.
The easiest way to make a simple invoice is by using a free invoice template you can find online or on computer programmes such as Microsoft Word. Failing that, you can simply make a document that includes your name, address, bank details, national insurance number, the work you've done, the amount you are owed, and the details of the business (company name, business address, etc.) that you did the work for.
Making an invoice is quick and simple and once you have done one you can use the same template again and again for future invoices. However, it is important that you assign each invoice a unique invoice number so you can be sure which one is which.
So let's jump in and take a closer look at what exactly invoices are.
What is an invoice?
An invoice is a bill that self-employed people, freelancers, and businesses send to customers or clients as a request for payment for goods or services. Invoices detail the items or services you are charging for and include all of the payment terms and information.
Invoices are a crucial component of bookkeeping as businesses need to keep and file any information regarding sales and services for tax purposes and accounting.
Invoices are not the same as receipts, which are an acknowledgement of payment. So a receipt would not be sent until the payment on an invoice had been completed.
Invoices are also distinct from purchase orders, which are a notification of intent to buy goods and services.
What should my invoices look like?
Your invoice should be kept simple and look professional. It should be clearly titled as an invoice along with the date at the top. You should also have your personal or business details, and the client's also at the top of the page.
If you are charging for work that was done over a period of time, break the work up into days or weeks with a clear pay rate and the total value of your work calculated at the end. Make sure this part of the invoice is as clear as possible and is neatly ordered by the date or the type of work.
What should I include on an invoice?
No matter how professional your invoice looks, it is useless unless it contains certain information.
On every invoice you need to include:
- A unique invoice identification number. An invoice number is a unique number that you assign to each invoice. It is crucial as it allows you to order and categorise your invoices. You can choose your own invoice numbering system but make sure that it remains consistent. An invoice number can contain either just numbers or numbers and letters.
- Either your name, address, and contact information (if you are self-employed) or your business's name, address, and contact information.
- The name and address of the client or customer you are invoicing.
- A clear description of what you are charging for.
- The invoice date - i.e. the date the invoice was sent.
- The date or dates that the goods or services were provided.
- The exact amount of money being charged.
- How much VAT is being charged (if applicable).
- The total amount owed.
If you or your business is registered for VAT, there is additional information you need to add to your invoice. VAT invoices require:
- Your VAT registration number (VRN)
- The net price of each product or service
- The VAT rate (20%, 5%, or 0%) of each product or service
- The subtotal of the sale excluding VAT
- The total amount of VAT being charged on the sale
These lists are not exhaustive, they are simply the legal minimum information required for each invoice. You may also want to include other information such as your bank payment details or national insurance number, though there is no legal obligation to do so.
Who needs an invoice?
Invoices should be used by all businesses that have charged other businesses for their services. This is known as Business to Business (or B2B).
Businesses are not obliged to send an invoice to customers - Business to Customer (B2C) - unless the customer asks for one.
Self-employed workers and freelancers should also use invoices so they can keep an official record of the work they have done and the subsequent taxes they will need to pay.
Where to find invoice templates
You can find both paid and free invoice templates online on sites such as Canva.
You can also make your own on an Office document by using Word. Simply open a new Word document and head to 'File' in the toolbar. There you should see the option 'New'. Follow this and then go to 'New Template' and search 'invoice'. You should then be presented with hundreds of invoice templates to use at your leisure!
What are the different types of invoices?
Although most invoices have to include the same information, there are different types of invoices for different transactions. Here, we will take a look at the main ones:
- Purchase invoice. This is the invoice received by the client or customer.
- Sales invoice. This is exactly the same as the purchase invoice but from the seller's end.
- Tax invoice. This invoice is sent by VAT registered companies and has the amount of VAT paid included on the invoice. There are different types of VAT invoices that we will look at later in the article.
- Past due invoice. This is an additional invoice that is sent to the client or customer when their payment has not met the deadline.
- Interim invoice. These are multiple invoices that are made for goods or services that are provided over a long period of time. For example, you may send an interim invoice monthly to a client or customer to remind them to pay monthly charges.
- Final invoice. This is the last invoice you give when any goods or services provided over a long period of time are complete.
- Pro forma invoice. This is an invoice that is an estimation of the costs to be paid by the customer or client. It is not a legal document of purchase. For example, you may send a pro format invoice to allow the buyer to calculate the customs cost of a shipment of goods.
- Commercial invoice. This is the follow-up invoice to the pro format invoice and is sent when the sales are official and complete.
- Credit memo or credit note. This invoice is issued when a buyer is overcharged and it indicates the updated and changed amounts.
Are invoices a legal requirement?
If you sell a client or a customer a product or service and you are both registered for VAT, you are required by law to give them an invoice.
If you are simply selling a product or service to a customer who is a member of the public, you are not legally obliged to give them an invoice. However, if they ask for an invoice or a receipt, you must give them one.
Invoices and VAT
Value Added Tax (VAT) is a tax that is added to the cost of most sales of both goods and services. It is a consumption tax that is paid for by the consumer.
The standard rate of VAT in the UK is 20%. However, there is also a reduced rate of VAT of 5% and zero-rated VAT for certain goods and services.
In the UK, you are legally required to register for VAT if you or your business have an annual taxable turnover that exceeds £85,000. Once you have applied, you will then receive a VAT registration number (VRN) that is unique to your business.
You may also voluntarily register for VAT if your turnover is below the £85,000 threshold. Businesses sometimes choose to do this if they expect to reach the threshold soon or if they want to reclaim VAT on business expenses.
Once you have registered for VAT, you need to keep a record of your transactions and sales and submit VAT reports to HMRC at the end of the year. You will also need to charge VAT on all your sales.
If you are registered for VAT, you are also eligible to claim back any VAT you have paid on business expenses such as office equipment or travel.
VAT invoice types
There are three different types of VAT invoices:
- full VAT
- simplified VAT
- modified VAT.
Full VAT invoice
A full VAT invoice is the most common form of VAT invoice and is generally the standard one that is used. A full VAT includes all the information we have already looked at such as VAT registration number, the net price of each product or service, VAT rate, etc.
Simplified VAT invoice
A simplified VAT invoice can only be issued for sales up to £250, anything above that and you must send a full VAT or a modified VAT invoice.
A simplified VAT invoice does not require the net price of each product or service nor the VAT rate or subtotal. Instead, you just enter the total amounts owed including VAT.
Modified VAT invoice
A modified VAT invoice is like a full VAT invoice, but it also includes the VAT-inclusive price of each amount, as well as the VAT-inclusive total.
Modified VAT invoices are only issued when the sale is over £250 and has been agreed upon by the client or customer to use the VAT inclusive amounts. If the client or customer does not agree to a modified invoice, then you will need to issue a full VAT invoice.
It is quick and easy to create professional invoices either by using an online invoice generator or by finding a simple invoice template on programmes such as Word.
When making an invoice, it is vital that you include your details, the business name and address, the amount you are owed and what it is for, and other details such as the date. Most templates should include space for all of the information you need.