In case of a tax compliance check, tax auditors are likely to verify whether or not all expense-related documents are in order and contain the relevant information. The most common expense documents are invoices and receipts. Here are the main differences between these two types of tax records.
Keeping tax records is one of the most essential aspects of running a business. If you’re meticulous about collecting expense-related documents, you make sure that your taxable profit is as low as possible. Documents that meet certain criteria are required to reclaim VAT.
Not all transactions are documented using paper or electronic files. But in case of a tax compliance check, you may be asked to provide evidence that your business transactions took place. For this purpose, receipts and invoices may come in quite handy.
Receipts acknowledge payments
A receipt is an acknowledgement from the vendor to the customer that the payment for goods or services has been received.
Companies issue receipts after all kinds of payments, including online, bank transfers, cheques, or “cash in hand”. A receipt is the buyer’s proof of payment and, at the same time, it requires the seller to pay taxes related to that sale.
Receipts from cash registers that you can get in shops or petrol stations typically contain information about the date of purchase, goods or services sold, the seller’s details, the amount paid, and the tax amount if applicable. Many receipts also contain information about the buyer and the method of payment, especially when the transaction is between two businesses.
A receipt is also proof of ownership of the products listed on the receipt. It’s often used to claim consumer rights in case of a faulty product to get a refund or to organise a return.
Invoices are requests for payments
Similarly to a receipt, an invoice documents a purchase between two businesses or a business and a consumer. Typically it’s issued before any payment has been made, and thus an invoice is a legally enforceable document meaning that the seller can use it as proof that the amount is owed.
An example of a purchase that requires an invoice is an ongoing service, such as from your hosting provider or online advertising campaigns.
Apart from standard information about the purchase, some invoices include the due date which may be for example 30 days. They may also include a discount for early payments.
It’s important to know the difference between an invoice and a Purchase Order, typically referred to as a PO. While invoices relate to completed transactions, a PO is the document issued earlier. A PO lists all requirements including products or services and their prices but it’s not a legally enforceable document.
Therefore every PO has a matching invoice, while not every invoice has a matching PO, due to the fact that POs are not used in every organisation.
VAT invoices make it possible to reclaim VAT
Only valid VAT invoices allow you to reclaim VAT and thus you need to make sure VAT invoices include all required details:
- The word ‘invoice’ on the document
- Unique invoice number that follows on from the last invoice
- Your business name and address
- Your VAT number
- The tax point (or ‘time of supply’) if this is different from the invoice date
- Customer’s name or trading name, and address
- Description of the goods or services
- Total amount excluding VAT
- Total amount of VAT
- Price per item, excluding VAT
- Quantity of each type of item
- Rate of any discount per item
- Rate of VAT charged per item – if an item is exempt or zero-rated make clear no VAT on these items
- Total amount including VAT
For sales under £250 (including VAT) you may use simplified receipts which include less information compared to the “full” VAT invoice. Simplified VAT invoices may NOT include:
- Customer’s name and address
- Total amount excluding VAT, total amount of VAT,
- Price per item excluding VAT
- Quantity of each type of item
- Discounts per item
Bear in mind that delivery notes, Purchase Orders or email messages are not valid VAT invoices and you cannot use them as evidence to reclaim VAT.
Digital vs print invoices and receipts
It’s worth noticing that there is no difference between invoices and receipts regarding how you store them: you don’t need to keep paper copies of your receipts and invoices.
Both print and digital copies of your sale and expense invoices and receipts are acceptable. Businesses must make sure that these documents are readable and easily accessible in case of a tax compliance check.