What is an invoice?

What does an invoice actually do?

An invoice is the formal ask for money. A quote says what a job will cost; an invoice says the job is done, or a stage of it is, and here is what you owe and by when. It is also the record both sides keep — the customer files it as a purchase, you file it as a sale.

In the books it does two things at once. It records the sale as income on the date it was raised, whether or not the money has arrived, and it creates a debtor: an amount the customer now owes you. When they pay, the debtor clears and the bank balance rises.

If you are VAT registered the invoice is also a tax document. HMRC requires certain details on it, and the customer needs it to reclaim the VAT you charged, so a sloppy invoice can cost them money and make them slow to pay you.

A worked example

A VAT-registered plumber replaces a boiler. Labour is £850 and materials £320, so the net amount is £1,170. VAT at 20% adds £234, and the invoice total is £1,404, due within 30 days.

The plumber's books now show £1,170 of sales, £234 of output VAT owed to HMRC on the next return, and a debtor of £1,404. The customer's books show the mirror image: a £1,170 cost, £234 of input VAT to reclaim, and a creditor of £1,404.

If the customer pays late, the invoice date is what the chasing letter, any interest claim and the aged debtors report all refer back to, which is why the date on it matters more than it looks.

What must a UK invoice include?

• —The word 'invoice', a unique sequential number and the date it was issued.
• —Your business name, address and contact details, and the customer's name and address.
• —A clear description of what was supplied, with quantities where relevant.
• —The amount due and the payment terms, including the due date and how to pay.
• —If VAT registered: your VAT number, the net amount, the VAT rate and amount, and the gross total.
• —For limited companies: the registered name, number and registered office address.