Self-billing is an
arrangement between a supplier and a customer. Both customer and supplier must
be VAT registered. Rather than the supplier issuing a tax invoice in the
normal way, the recipient of the supply raises a self-billing document. The
customer prepares the supplier’s invoice and forwards a copy to the supplier
with the payment.
If a business wants to put a self-billing
arrangement in place it does not have to tell HMRC or get approval from them,
but it does have to get its supplier or customer to agree to the arrangement
and meet certain conditions.
The main advantage of self-billing is that
it usually makes invoicing easier if the customer (rather than the supplier)
determines the value of the purchase after the goods have been delivered or the
services supplied. This could apply more in certain areas such as;
royalties, the construction industry, Feed-In-Tariff, and scrap metal. A
further benefit is that accounting staff will be working with uniform purchase
documentation.
However, there is
a high risk of errors, significant confusion and audit trail weaknesses. The
wrong rate of VAT may easily be applied, documents can go missing, invoices may
be raised as well as self-billing documents, the conditions for using
self-billing may easily be breached (a common example is a supplier
deregistering from VAT) and essential communication between the parties can be
overlooked. As the Tribunal chairman in UDL Construction
Plc observed: “I regard the self-billing procedure as a gross violation of the
integrity of the VAT system. It permits a customer to originate a document
which enables him to recover input tax and obliges his supplier to account for
output tax. It goes without saying that such a dangerous procedure should be
strictly controlled and policed.”
The rules
For the customer
You can set up self-billing arrangements with your suppliers as long as you can meet certain conditions, you’ll need to:
- Enter into an
agreement with each supplier
- Review agreements with
suppliers at regular intervals
- Keep records of each of the
suppliers who let you self-bill them
- Make sure invoices contain the
right information and are correctly issued. This means including all of
the details that make up a full VAT invoice – details here
If a supplier stops being registered for
VAT then you can continue to self-bill them, but you can’t issue them with VAT
invoices (and you cannot claim any input tax). Your self-billing arrangement
with that supplier is no longer covered by the VAT regulations.
The Agreement
A self-billing arrangement is only valid
if your supplier agrees to put one in place. If you don’t have an agreement
with your supplier your self-billed invoices won’t be valid VAT invoices – and
you won’t be able to reclaim the input tax shown on them.
You’ll both need to sign a formal
self-billing agreement. This is a legally binding document. The agreement
must contain:
- Your supplier’s
agreement that you, as the self-biller, can issue invoices on your supplier’s
behalf
- Your supplier’s
confirmation that they won’t issue VAT invoices for goods or services covered
by the agreement
- An expiry date –
usually for 12 months’ time but it could be the date that any business contract
you have with your supplier ends
- Your supplier’s
agreement that they’ll let you know if they stop being registered for VAT, get
a new VAT registration number or transfer their business as a going concern
- Details of any
third party you intend to outsource the self-billing process to.
An example of an agreement here
Reviewing self-billing agreements
Self-billing agreements usually last for
12 months. At the end of this you’ll need to review the agreement to make sure
you can prove to HMRC that your supplier agrees to accept the
self-billing invoices you issue on their behalf. It’s very important that you
don’t self-bill a supplier when you don’t have their written agreement to do
so.
Records
If you are a self-biller you’ll need to
keep certain additional records:
- Copies of the
agreements you make with your suppliers
- The names,
addresses and VAT registration numbers of the suppliers who have agreed that
you can self-bill them
If you don’t keep the required records,
then the self-billed invoices you issue won’t be proper VAT invoices.
Invoices
Once a
self-billing agreement is in place with a supplier, you must issue self-billed
invoices for all the transactions with them during the
period of the agreement.
As well as all the details that must go on
a full VAT invoice you will also need to include your supplier’s:
- name
- address
- VAT registration
number
All self-billed
invoices must include the statement “The VAT shown is your output tax due
to HMRC” and you must clearly mark each self-billed invoice you raise with
the reference: ‘Self Billing’ (This rule has the force of law).
Details required on invoice here
Input tax
You’ll only be
able to reclaim the input tax shown on self-billed invoices if you meet all the
record keeping requirements. When you can reclaim the input tax depends
on the date when the supply of the goods or services takes place for VAT
purposes. This is known as the the tax point, details here
For the supplier
If one of your customers wants to set up a self-billing arrangement with you, they will be required to agree to this with you in writing. If you agree, they’ll give you a self-billing agreement to sign.
The terms of the agreement are a matter
between you and your customer, but there are certain conditions you’ll both
have to meet to make sure you comply with VAT regulations:
- Sign and keep a
copy of the self-billing agreement
- Agree not to issue
any sales invoices to your customer for any transaction during the period of
the agreement
- Agree to accept
the self-billing invoices that your customer issues
- Tell your customer
at once if you change your VAT registration number, deregister from VAT, or
transfer your business as a going concern.
Accounting for output tax
The VAT figure on the self-billed invoice
your customer sends you is your output tax.
You are accountable to HMRC for output tax on the supplies you make to your customer, so you should check that your customer is applying the correct rate of VAT on the invoices they send you. If there has been a VAT rate change, you will need to check that the correct rate has been used.
Tips
- As a supplier,
take care not to treat self-billed invoices as purchase invoices and reclaim
the VAT shown as input tax
- As a customer,
carry out an instant check of VAT registration numbers here
- As a supplier or
customer regularly check that the conditions for self-billing continue to be
met and ensure good communications
- As a supplier or
customer ensure that the documentation accurately reflects the relevant
transactions and the correct VAT rate is applied
- As a supplier or
customer ensure that there is a clear audit trial and that all documentation is
available for HMRC inspection
- It is possible to
use self-billing cross-border intra-EC, but additional rules apply.
