Self-billing is a convenient arrangement between a supplier and their customer where the customer bills on the supplier’s behalf.
Whilst there are benefits to this, we have seen first-hand several times when this can fall apart.
This article aims to briefly explain what self-billing is and how it operates between VAT registered parties. We will discuss the pros and cons and include our recommendations to avoid common pitfalls.
What is self-billing?
Self-billing refers to a commercial arrangement between a supplier and their customer, wherein an agreement is entered into that the customer (the self-biller) will raise invoices on behalf of the supplier (the self-billee) for the goods or services provided to them. Invoices are then sent to the supplier along with the corresponding payments.
There are no further requirements if the parties are not VAT registered. However, if they are, then there are additional regulations imposed by HMRC. These are:
- Have a formal self-billing agreement signed by both parties prior to commencement. This will contain things such as the supplier agreeing to not issue their own VAT invoices and to tell the self-biller if they de-register from VAT.
- Review the agreement at regular intervals, at least annually. The length of the agreement should be specified in the signed document.
- The self-biller should keep a record of the names, addresses, and VAT numbers of all suppliers who agree to self-billing.
- Invoices must be valid VAT invoices, with the narratives ‘self-billed’ and ‘The VAT shown is your output tax due to HMRC’ included. Care needs to be taken that VAT is not added where the supplier is not VAT registered.
It’s not necessary to get HMRC’s approval before self-billing.
Benefits
The main benefit is to save time and money for both supplier and customer.
The self-biller’s accounting staff will be working with uniform purchase documentation which makes processing the invoices much easier.
It may make 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 may be the case if the customer is better equipped to determine this, such as agents self-billing for their commission or sellers of digital services.
The self-billee will have better cashflow forecasts as they can expect payments on a regular basis.
Disadvantages
However, there are some less desirable implications of the self-billing arrangement, particularly when it is not followed correctly.
Firstly, the supplier remains liable for accounting for the output tax even though they are relying on invoices and payment from the self-biller. So if VAT is found to have been underdeclared, it is up to the supplier to correct this, potentially at their own expense.
If the regulations are not adhered to, then the self-billed invoice is not a valid VAT invoice. This means input VAT cannot be recovered by the customer and the supplier is still required to issue a VAT invoice.
There is also the potential for the supplier to mistakenly recover the VAT on the self-billed invoices as input tax, rather than pay it as output tax. This is why the narrative should be included on the invoice to minimise any confusion.
Furthermore, where self-billed invoices are created and sent out manually there can be a weakness in the audit trail. Invoices may be missed or could contain errors.
Case study
We have been helping a client with an HMRC VAT enquiry which partially relates to transactions involving a self-billing arrangement. Invoices and credit notes were not sent to our client, the supplier, as they should have and so they were required to enter into lengthy discussions with the self-biller in order to obtain these to satisfy HMRC.
This has greatly delayed the enquiry which has been ongoing since 2021. It is clear that it would have been significantly shorter had the documents been available straight away or if the client had issued invoices themselves.
Recommendations
Our main recommendation is to be consistent and thorough with checking all risk areas mentioned above:
- Self-billers should carry out checks of VAT registration numbers when a new arrangement is put in place and regularly thereafter. HMRC have a dedicated website for this.
- Self-billees should take care not to recover the VAT shown on invoices as input tax.
- Both parties should regularly check all the conditions are met and have good communications. They should also ensure there is a clear audit trail and all relevant documents are conveniently saved in case of HMRC inspection.
- Both parties should ensure that the self-billed invoices accurately reflect the relevant transactions and the correct VAT rates are applied.
To mitigate the financial impact should something go wrong, consideration should be given as to whether indemnities are included in the self-billing agreement.
We can help
If you are having issues with self-billing or if HMRC are questioning transactions, we can help you to get to the bottom of it and advise on next steps.
We can also help you to set up a self-billing arrangement. Please contact Aaron Norman on 01622 933803 or Sue Rathmell on 01622 577803.
