Self-billing: where the customer issues the invoice (and how this can go wrong).
A recent case Court of Appeal case: GB Housley here has highlighted the inherent dangers of using the self-billing system. Self-billing is a very useful mechanism for a lot of businesses, especially in respect of activities like royalties and scrap purchases where the supplier may not know (or know immediately) the value of the supply. Before we look at the case, it may be useful to recap the rules for self-billing.
Self-billing is an arrangement between a supplier and a customer. Both customer and supplier must be VAT registered. The customer prepares the supplier’s invoice and forwards a copy to the supplier with the payment. There is no requirement to notify HMRC or get approval for using the arrangement.
If you are the customer
You issue the documentation and you are able to reclaim as input tax the VAT shown on the self-billing invoice.
In order to set up self-billing arrangements with your supplier you are required 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 required information and are correctly issued
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. Your self-billing arrangement with that supplier is no longer covered by the VAT regulations.
Self-billing agreements
You can only operate a self-billing arrangement 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, and you won’t be able to reclaim the input tax shown on them.
Both parties 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
- details of any third party you intend to outsource the self-billing process to
Reviewing self-billing agreements
Self-billing agreements usually last for 12 months. At the end of this you will 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.
Record keeping
If you are a self-biller you’ll need to keep certain records. These are:
- 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.
All self-billed invoices must include the statement “The VAT shown is your output tax due to HMRC”.
It is important that a business does not add VAT to self-billed invoices that it issues to suppliers who are not VAT-registered.
A business will only be able to reclaim input tax shown on self-billed invoices if it meets all the record keeping requirements.
If you are a VAT registered supplier
If one of your customers wants to set up a self-billing arrangement with you, they’ll ask you to agree to this in writing. If you agree, they will give you a self-billing agreement to sign.
For VAT purposes you will be required to do all of the following:
- 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
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.
The Case
The issues were whether the lack of formalised self-billing agreements disqualified the use of self-billing, and if that was the case, whether alternative evidence should have been accepted to support a claim for input tax. The CoA discharged HMRC’s assessment which was issued to GB Housley – a scrap metal merchant.
The assessment was based on input tax claims made on the basis of the self-billed documents. It was ruled that although the self-billing was used in error, HMRC should have considered alternative evidence and used its discretion on whether to allow the claims on transactions which took place. For this reason, as it is unclear whether HMRC would have assessed if they had considered other information, the assessment should be removed.
A timely warning to ensure that all of the conditions of self-billing arrangements are met, and that this is clearly demonstrable. Ongoing monitoring is crucial for businesses operating self-billing as an overlooked change can affect the VAT treatment.
In this case, it looks like the applicant was rather fortunate, but this outcome cannot be relied on if self-billing is applied incorrectly.
We are able to advise on such agreements, arrangements and accounting.