Should you agree to your customer’s self-billing request?
A customer wants to adopt a self-billing system, meaning they will issue invoices on your behalf and charge VAT or otherwise. Can you refuse their request and what are the risks of accepting?
What is self-billing?
A self-billing system means that your customer will issue sales invoices on your behalf, and you must not invoice them. The customer will know if you are VAT registered and will therefore add 20% VAT to the self-billed invoices if the work carried out is standard-rated. You will account for VAT on your return that includes the “tax point” shown on the document, unless you use the cash accounting scheme (CAS) when the payment date is relevant. A valid self-billing arrangement must meet the following conditions:
- the supplier and customer must both agree to adopt it, either signing an agreement on paper on in electronic form
- the customer must prepare the agreement with a specified start and finish date. HMRC has provided an example in its public notice which can be used or adapted
- the self-billed document issued by a customer is the only acceptable document for VAT purposes. It must always show the “tax point” date, i.e. the date when the supplier must declare output tax to HMRC on their return.
Your customer does not need HMRC’s approval to adopt self-billing so don’t ask them for any confirmation letter etc.
HMRC could ask to see the self-billing agreement if it carries out a compliance visit, so you should retain it as an important part of your records.
Why agree to self-billing?
Your customers might be better placed to know the fees you should charge at the end of, say, a month or quarter. For example, many contracts in the construction industry make regular monthly payments based on measured work; the customer’s surveyor often calculates the amount that is owed. A self-billing system speeds up the process because you don’t need to contact them to ask how much to invoice for.
Example. John is an author and is paid 15p per word plus VAT for articles he writes for a publisher. It is likely that only the publisher will know the exact word count, e.g. are words used in headlines or bylines included in the payment? A self-billed arrangement might be more efficient and save time.
If you don’t use the CAS, you will account for VAT on the return that includes the “tax point” date shown on the self-billed document. This date could be several days or weeks before the customer pays, leaving your business with a temporary cash-flow challenge.
What are the risks and can you refuse?
It is your responsibility to charge the correct rate of VAT to your customers on your supplies of goods and services, even though they will issue the self-billed invoices. The risks are therefore lower if your sales are all subject to 20% VAT. Many customers are not clear about when zero or 5% VAT is charged in some cases!
HMRC will not insist that you agree to self-billing with your customers, it is your decision. However, your customers might insist on using self-billing as a condition of doing business with them, in which case you could lose money by refusing their request.
If you agree to self-billing, it will apply to all of your sales with that customer; you cannot pick and choose.
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