Complete Guide to Self-Billing Invoices: Definition, Rules & Benefits

A self-billing invoice is an arrangement between the supplier and the buyer, wherein the customer prepares the invoice for the supplier and sends them a copy along with the payment.

Both parties have to be VAT registered for this prior agreement. After that, they will be able to issue VAT invoices based on the VAT number generated and the following conditions.

One benefit of the Self-billing invoice is that the buyer of the goods doesn’t have to wait for the seller to send an invoice before making payment. They can create a self-billing invoice by using a free online invoice generator to make the payment.

Similarly, the seller of the goods and services doesn’t need to create an invoice to get paid either. Invoice is generated once the timesheet has been approved by the self-biller.

Understanding Self-Billing Invoices

To understand the concept of self-billing invoices, it’s essential to clarify what they represent. Let’s briefly explore the idea of self-billing invoices.

What is self-billing?

Self-billing is when the buyer creates the invoice for the seller. This system is useful for buyers who regularly purchase from a supplier, as it makes payments easier by removing the need for suppliers to generate invoices. Both parties must agree to self-billing in advance, ensuring they follow tax laws and understand the payment terms clearly.

Key components of self-billing

The key components of a self-billing invoice are as follows:

• Agreement and authorization: This ensures that both buyer and seller are willing to comply with the tax as well as legal requirements. Simply put, it indicates a formal agreement between both the parties.
• Unique invoice numbering: The buyer assigns a unique numbering pattern to maintain a clear and organized tracking module to ensure consistency.
• Details of goods or services: A clear description of the goods or services received, with itemized details, quantities, prices, and applicable taxes.
• VAT or Tax information: The buyer’s VAT number and the supplier’s VAT information such as tax rates and amounts must also be displayed.
• Payment terms: Self-billing agreements specify payment terms, including due dates and methods, ensuring both buyer and seller are aligned on payment expectations.

Rules for Self-invoicing

Usually, the supplier is responsible for issuing VAT invoices. However, in some cases, the buyer may decide to prepare the invoice and send it to the supplier. This billing arrangement between both parties is called self-billing.

This invoice type can be used by any business, but there are certain conditions to be met for this process to take place.

The following are the conditions for the viability of a self-billing agreement.

• The customer and the supplier would have agreed that the buyer creates the invoice.
• The customer and the supplier must be VAT registered.
• The new self-billing agreement will be reviewed from time to time.
• The buyer has to keep records of the seller’s goods to allow self-billing.
• The said self-billing invoice has to contain all the necessary details that should be included in a VAT invoice.
• If the seller of goods is no longer registered for VAT, the buyer will continue issuing the invoice. Still, they cannot include any input tax since VAT regulations no longer guide the arrangement.

Also, it is essential to take note of the below-mentioned points.

• Self-billing does not affect contracts and commercial agreements.
• Both the supplier and the buyer must have copies of correctly issued self-billing invoices for tax purposes.

When the self-billing arrangement has been made to issue self-billed invoices, the VAT registered customer generates the invoices throughout the contract.

What Does a Self-billing Invoice Look Like?

Aside from the details of a VAT invoice, the details to be included in a self-billing invoice are:

• It has to be labeled “Self-billing Invoice”
• Name, address, phone number, and email of both the customer and the seller
• Unique invoice identification number
• VAT registration number of the buyer and seller
• This statement has to be included “The VAT Invoice shown is your output tax due to HMRC.”

It is left to the buyer and seller in the self-billing agreement to ensure that the self-billed invoices must contain all the details of the goods bought with the appropriate VAT rate.

Why Use Self Billing?

Here are some of the benefits of self-billing:

• Self-billing saves time and reduces administrative tasks for the buyer and seller. Self-billing invoice also reduces costs and saves time spent on managing invoices.
• self-billing invoices are created by the customers, so they choose the format good for their financial administration.
• When the timesheet is approved, the self-billing invoice is prepared and paid, and it means easy and fast payment for the seller.
• self-billing invoices are prepared when a timesheet is approved, and as such, the self-bill invoice contains the exact terms, days, or hours worked with their dates. There’s no room for error in a self-billing invoice.

If you prefer a self-billing invoice as a customer and your vendor is willing to get into an agreement with you, contact a tax specialist before reaching an agreement with them.

What a Business Should Double-check in a Self-billing Invoice?

Similar to everything, the self-billing invoice agreement too has a few cons.

Having said that, these are the points that can easily mitigate errors.

• Any invoicing discrepancies
• Correct vat rate and vat registration numbers as per VAT regulations
• Pay attention to the audit trail
• Compliance with conditions relating to self-billing

Sometimes, buyers may issue a self-billing invoice with the help of a third party on their behalf. Regardless, the buyer is still responsible for making sure the invoice is prepared and sent.

The buyer should also make sure that every billing agreement is kept with the seller. Records of every stage of the transactional process should also be kept with the correct details of the business for referencing purposes and inspection by the HMRC.

The seller shouldn’t see self-billing invoices as purchase invoices but can reclaim the VAT rate included as input tax.

However, if you want to streamline your invoicing process leaving no room for invoicing mistakes, use the InvoiceOwl app. It lets you create and send accurate invoices on the go.