Learning Outcomes
After studying this article, you will be able to identify when a VAT invoice must be issued, explain the legal requirements for VAT invoice content, distinguish between types of VAT invoices, and apply the correct VAT rate to legal services and other supplies. You will also be able to address common VAT invoice errors and understand the implications for both suppliers and customers, as required for the SQE1 FLK1 exam.
SQE1 Syllabus
For SQE1, you are required to understand VAT invoicing obligations for VAT-registered businesses, including the legal requirements for issuing VAT invoices, the information that must be included, and the consequences of non-compliance. In your revision, focus on:
- When a VAT invoice must be issued and to whom
- The mandatory contents of a VAT invoice
- The distinction between full, simplified, and modified VAT invoices
- Application of the correct VAT rate to supplies, including legal services
- Special rules for cross-border supplies and the reverse charge
- Correction of VAT invoice errors and the use of credit notes
- The impact of VAT invoices on input tax recovery
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Which details are legally required on a full VAT invoice issued by a UK VAT-registered business?
- When must a VAT-registered solicitor issue a VAT invoice to a client?
- What is the difference between a full VAT invoice and a simplified VAT invoice?
- How should a UK law firm invoice a business client in France for legal advice?
Introduction
Issuing VAT invoices is a core obligation for VAT-registered businesses in England and Wales. VAT invoices serve as the official record of taxable supplies and are essential for customers wishing to reclaim input VAT. The Value Added Tax Act 1994 and HMRC regulations set out strict requirements for when and how VAT invoices must be issued, what information they must contain, and the consequences of errors or omissions.
When Must a VAT Invoice Be Issued?
A VAT-registered business must issue a VAT invoice whenever it makes a taxable supply of goods or services to another VAT-registered business. This includes most supplies of legal services, consultancy, and goods. A VAT invoice is not required for sales to non-business customers (consumers), but may be provided on request.
Key Term: VAT invoice
A document issued by a VAT-registered supplier to a customer, showing the VAT charged on a taxable supply and containing all legally required information.
Legal Requirements for VAT Invoice Content
A valid VAT invoice must include specific details. Failure to include these may prevent the customer from reclaiming input VAT and can result in penalties.
Key Term: input VAT
VAT paid by a business on purchases and expenses, which may be reclaimed from HMRC if the business makes taxable supplies.
The required elements of a full VAT invoice are:
- A unique, sequential invoice number
- The supplier’s name, address, and VAT registration number
- The invoice date and the tax point (date of supply) if different
- The customer’s name and address
- A clear description of the goods or services supplied
- The quantity of goods or extent of services
- The unit price (excluding VAT)
- The net amount payable (excluding VAT)
- The rate of VAT applied to each item
- The total VAT charged
- The total amount payable (including VAT)
Key Term: tax point
The date when a supply of goods or services is treated as taking place for VAT purposes, usually the date of delivery, completion, or payment.
Types of VAT Invoice
There are three main types of VAT invoice:
Key Term: full VAT invoice
A standard invoice containing all legally required details, used for supplies over £250 (including VAT).Key Term: simplified VAT invoice
A shorter invoice permitted for supplies under £250 (including VAT), which omits some details such as the customer’s address and shows only the total VAT.Key Term: modified VAT invoice
An invoice format allowed for retail sales over £250, combining features of full and simplified invoices.
A full VAT invoice is required for most business-to-business supplies. A simplified VAT invoice may be used for retail sales under £250. A modified VAT invoice is used for certain retail sales over £250.
VAT Rates and Application
The correct VAT rate must be shown on the invoice. The main rates are:
- Standard rate (20%): applies to most goods and services, including legal services.
- Reduced rate (5%): applies to certain supplies, such as domestic fuel.
- Zero rate (0%): applies to specific goods, such as most food and children’s clothing.
- Exempt: no VAT is charged, and no input VAT can be reclaimed.
Key Term: exempt supply
A supply of goods or services on which no VAT is charged and for which input VAT cannot be reclaimed.
Cross-Border Supplies and the Reverse Charge
Special rules apply to supplies of services to customers outside the UK. For business customers in the EU or overseas, the "place of supply" rules and the reverse charge may apply.
Key Term: reverse charge
A mechanism where the customer, not the supplier, accounts for VAT on certain cross-border supplies of services.
If a UK law firm supplies legal services to a business customer in the EU, no UK VAT is charged. The invoice must state that the reverse charge applies, and the customer accounts for VAT in their own country.
Correction of VAT Invoices and Credit Notes
If a VAT invoice contains an error, the supplier must issue a credit note referencing the original invoice and showing the correction. The credit note must contain the same details as a VAT invoice.
Key Term: credit note
A document issued by a supplier to correct or cancel all or part of a previously issued VAT invoice.
Consequences of Failing to Issue a Valid VAT Invoice
If a business fails to issue a valid VAT invoice, the customer cannot reclaim input VAT, and the supplier may face penalties from HMRC. Inaccurate invoices can also lead to VAT assessments and interest charges.
Worked Example 1.1
A VAT-registered solicitor provides legal advice to a VAT-registered business client and charges £2,000 plus VAT. What must the solicitor include on the invoice, and why is this important?
Answer: The solicitor must issue a full VAT invoice showing their name, address, VAT number, the client’s name and address, a unique invoice number, the date, a description of the services, the net amount (£2,000), the VAT rate (20%), the VAT amount (£400), and the total (£2,400). This enables the client to reclaim input VAT and ensures legal compliance.
Worked Example 1.2
A UK law firm supplies legal services to a French business. Should UK VAT be charged, and what must the invoice state?
Answer: No UK VAT is charged. The invoice should state "reverse charge applies" or "supply subject to reverse charge," and include all other required details. The French business accounts for VAT in France.
Exam Warning
If a VAT invoice is missing key details, such as the supplier’s VAT number or the correct VAT rate, the customer cannot reclaim input VAT. Always check invoices for compliance.
Revision Tip
For SQE1, memorise the mandatory contents of a full VAT invoice and know when simplified or modified invoices are permitted.
Key Point Checklist
This article has covered the following key knowledge points:
- When a VAT invoice must be issued and to whom
- The mandatory information required on a full VAT invoice
- The differences between full, simplified, and modified VAT invoices
- The correct application of VAT rates to legal and other supplies
- The rules for cross-border supplies and the reverse charge
- The procedure for correcting VAT invoices and issuing credit notes
- The consequences of failing to issue a valid VAT invoice
Key Terms and Concepts
- VAT invoice
- input VAT
- tax point
- full VAT invoice
- simplified VAT invoice
- modified VAT invoice
- exempt supply
- reverse charge
- credit note
