Learning Outcomes
This article outlines key VAT invoicing obligations for UK legal services and the compliance issues most likely to be examined in SQE1 FLK1, including:
- When a VAT invoice must be issued, to which clients, and the consequences of issuing late or not at all
- Legal requirements for VAT invoice content, with emphasis on items exam questions commonly test (invoice numbers, VAT numbers, tax points)
- Distinctions between full, simplified, and modified VAT invoices, and when each format is permitted or required
- Application of the correct VAT rate to legal services, mixed supplies, zero‑rated and exempt items, and how these should be shown on the invoice
- Identification of common VAT invoice errors, their effect on output tax and input tax recovery, and how HMRC may respond
- Tax point rules, including basic and actual tax points, prepayments, and statutory deadlines for issuing VAT invoices
- Conditions for using simplified or modified invoices in retail and low‑value transactions, and their impact on input VAT recovery
- Operation of reverse charge and place‑of‑supply rules for cross‑border legal services, and how these alter what appears on the invoice
- Distinguishing true disbursements from recharges on legal invoices and presenting each correctly for VAT purposes
- Record‑keeping and electronic invoicing requirements that support claims for input tax and provide an adequate audit trail
- Use of credit notes and replacement invoices to correct errors and adjust VAT previously accounted for
SQE1 Syllabus
For SQE1, you are required to understand VAT invoicing obligations for VAT-registered businesses, including the legal requirements for issuing VAT invoices, the information that must be included, and the consequences of non-compliance, with a focus on the following syllabus points:
- When a VAT invoice must be issued and to whom
- The mandatory contents of a VAT invoice
- The distinction between full, simplified, and modified VAT invoices
- Application of the correct VAT rate to supplies, including legal services
- Special rules for cross-border supplies and the reverse charge
- Correction of VAT invoice errors and the use of credit notes
- The impact of VAT invoices on input tax recovery
- Tax point rules (including the 14‑day invoice rule and prepayments) and the 30‑day requirement to issue a VAT invoice to a taxable person
- The difference between zero‑rated and exempt supplies and how each should be shown on an invoice
- Treatment of disbursements and recharges on legal invoices
- Electronic invoicing and record‑keeping requirements to support input tax claims
Test Your Knowledge
Attempt these questions before reading this article. If you find some difficult or cannot remember the answers, remember to look more closely at that area during your revision.
- Which details are legally required on a full VAT invoice issued by a UK VAT-registered business?
- When must a VAT-registered solicitor issue a VAT invoice to a client?
- What is the difference between a full VAT invoice and a simplified VAT invoice?
- How should a UK law firm invoice a business client in France for legal advice?
Introduction
Issuing VAT invoices is a core obligation for VAT-registered businesses in England and Wales. VAT invoices serve as the official record of taxable supplies and are essential for customers wishing to reclaim input VAT. The Value Added Tax Act 1994 and HMRC regulations set out strict requirements for when and how VAT invoices must be issued, what information they must contain, and the consequences of errors or omissions. VAT invoices support the basic VAT mechanism: output tax is charged on supplies to customers and input tax is recovered on business purchases, with the net amount accounted to HMRC via quarterly VAT returns.
Key Term: VAT invoice
A document issued by a VAT-registered supplier to a customer, showing the VAT charged on a taxable supply and containing all legally required information.
When Must a VAT Invoice Be Issued?
A VAT-registered business must issue a VAT invoice whenever it makes a taxable supply of goods or services to another VAT-registered business. This includes most supplies of legal services, consultancy, and goods. A VAT invoice is not required for sales to non-business customers (consumers), but may be provided on request. For VAT purposes, the obligation to issue a VAT invoice to a taxable person applies whether the supply is standard‑rated, reduced‑rated or zero‑rated. No VAT invoice is required for exempt supplies because no VAT is charged and input tax cannot be recovered by the customer on exempt supplies.
HMRC expects VAT invoices to be issued within 30 days of the time of supply (tax point) to a taxable person. Timely invoicing ensures that the tax point is clear and that customers have valid evidence to support input tax recovery in the correct VAT period.
Key Term: taxable person
A person (individual, partnership or company) who makes taxable supplies and is, or is required to be, registered for VAT. Registration is compulsory when taxable turnover exceeds £85,000 in any 12‑month period; voluntary registration is permitted if taxable supplies are made.
Retailers dealing with consumers typically provide receipts rather than full VAT invoices. Where the consideration is £250 or less (including VAT), a simplified VAT invoice may be used. In some sectors, self‑billing arrangements operate, under which the customer issues the supplier’s VAT invoices; these require prior written agreement and specific content rules so that the supplier’s output tax and the customer’s input tax are properly accounted.
Key Term: tax point
The date when a supply of goods or services is treated as taking place for VAT purposes, usually the date of delivery, completion, or payment. If a VAT invoice is issued within 14 days of the basic tax point, the invoice date becomes the tax point unless a prepayment created an earlier tax point.
A “pro‑forma” document is not a VAT invoice and must not be used to account for VAT. VAT should only be charged at the time of supply (or prepayment) and supported by a valid tax invoice to taxable customers.
Legal Requirements for VAT Invoice Content
A valid VAT invoice must include specific details. Failure to include these may prevent the customer from reclaiming input VAT and can result in penalties. VAT Regulations specify mandatory content for full VAT invoices; the format may be electronic or paper provided authenticity and integrity are maintained.
Key Term: input VAT
VAT paid by a business on purchases and expenses, which may be reclaimed from HMRC if the business makes taxable supplies.
The required elements of a full VAT invoice are:
- A unique, sequential invoice number
- The supplier’s name, address, and VAT registration number
- The invoice date and the tax point (date of supply) if different
- The customer’s name and address
- A clear description of the goods or services supplied
- The quantity of goods or extent of services
- The unit price (excluding VAT)
- The net amount payable (excluding VAT)
- The rate of VAT applied to each item
- The total VAT charged
- The total amount payable (including VAT)
Additional points to ensure compliance:
- Multi‑rate supplies must clearly show each VAT rate applied and the net value per rate so the total VAT can be verified.
- If any discount is applied, the invoice should show the net value after discount and the VAT calculated on that net value.
- Zero‑rated items should be marked “zero‑rated” and exempt items should be marked “exempt.” Exempt items do not contribute to output tax and cannot support input tax recovery by the customer.
- Invoices may be issued in a foreign currency, but the total VAT must be convertible to sterling for VAT return purposes. Either show the sterling VAT amount or the exchange rate used to compute sterling.
- Electronic invoices are acceptable, provided the business keeps complete records and can demonstrate the authenticity of origin and integrity of content. Copies of VAT invoices must be retained (in paper or digital form) for record‑keeping purposes, typically six years.
Legal invoices often include expenses. It is important to distinguish between true disbursements and recharges:
Key Term: disbursement
A payment a business makes as agent for a client, where the relevant supply is made to the client by a third party. If the conditions for a disbursement are met, the amount passed on is outside the scope of VAT and no VAT is charged on it by the agent.
Expenses that do not meet disbursement criteria (for example, counsel’s fees incurred by a law firm in delivering an overall supply of legal services) are part of the firm’s own supply to the client. The firm recovers input tax from counsel’s invoice (if applicable) and charges output tax on its own invoice to the client for the total amount of its supply. True disbursements must be clearly identified and separately listed on the invoice as outside the scope of VAT.
Key Term: output tax
VAT charged by a VAT‑registered business on supplies it makes to customers. Output tax, less input tax, is accounted to HMRC in VAT returns.
Types of VAT Invoice
There are three main types of VAT invoice:
Key Term: full VAT invoice
A standard invoice containing all legally required details, used for supplies over £250 (including VAT).Key Term: simplified VAT invoice
A shorter invoice permitted for supplies under £250 (including VAT), which omits some details such as the customer’s address and shows only the total VAT.Key Term: modified VAT invoice
An invoice format allowed for retail sales over £250, combining features of full and simplified invoices.
A full VAT invoice is required for most business-to-business supplies. A simplified VAT invoice may be used for retail sales under £250. A modified VAT invoice is used for certain retail sales over £250.
In more detail:
- Simplified invoices must show the supplier’s name and address, VAT registration number, the invoice date (or tax point), a description sufficient to identify the goods or services, and for each VAT rate used, the total amount payable including VAT and the VAT rate. The customer’s details and net values per item may be omitted. Simplified invoices can support input tax recovery for purchases that do not exceed £250 (including VAT).
- Modified invoices are tailored for retail environments where prices are generally VAT‑inclusive and multiple items at different VAT rates may be sold. They must enable the VAT to be calculated by showing the total consideration, VAT‑inclusive values grouped by rate, and the applicable VAT rates. They combine the legibility of a full invoice with the practicalities of retail pricing.
VAT Rates and Application
The correct VAT rate must be shown on the invoice. The main rates are:
- Standard rate (20%): applies to most goods and services, including legal services.
- Reduced rate (5%): applies to certain supplies, such as domestic fuel.
- Zero rate (0%): applies to specific goods, such as most food and children’s clothing.
- Exempt: no VAT is charged, and no input VAT can be reclaimed.
Key Term: exempt supply
A supply of goods or services on which no VAT is charged and for which input VAT cannot be reclaimed.
Legal services are generally standard‑rated at 20%. Where a supplier makes mixed supplies, the invoice must segregate lines by VAT rate. Zero‑rated supplies still require invoicing to taxable customers if they are to support input tax recovery. Exempt supplies should be shown separately and marked “exempt” (no VAT charged and no input tax recovery for the customer on that line).
Record‑keeping is essential to applying VAT correctly. Output tax must be reported in the VAT return period corresponding to the tax point, and input tax may be reclaimed if the business holds a valid VAT invoice supporting the purchase and the purchase relates to taxable (including zero‑rated) supplies.
Cross-Border Supplies and the Reverse Charge
Special rules apply to supplies of services to customers outside the UK. For business customers overseas, the “place of supply” rules and the reverse charge may apply.
Key Term: reverse charge
A mechanism where the customer, not the supplier, accounts for VAT on certain cross-border supplies of services.Key Term: place of supply
The jurisdiction in which a service is treated as supplied for VAT purposes. Under the general rule, B2B services are supplied where the customer belongs and B2C services are supplied where the supplier belongs.
If a UK law firm supplies legal services to a business customer outside the UK, the general rule for services places the supply where the customer belongs. No UK VAT is charged. The invoice must state that the reverse charge applies (for EU and many overseas jurisdictions) or that the supply is outside the scope of UK VAT, and the customer accounts for VAT in their own country if required by local rules. If the customer is a consumer (non‑business), the general rule places the supply in the UK and standard‑rated VAT will be charged unless a specific exception applies.
For goods, Northern Ireland applies EU VAT rules for movements of goods with the EU. For services, UK rules apply uniformly. On cross‑border invoices, include any required statements (for example, “Reverse charge: customer to account for VAT”) and ensure clarity on the customer’s status (business or consumer) to determine whether UK VAT applies.
Correction of VAT Invoices and Credit Notes
If a VAT invoice contains an error, the supplier must issue a credit note referencing the original invoice and showing the correction. The credit note must contain the same details as a VAT invoice. A replacement correct invoice may also be issued, but the VAT account must reflect the adjustment through a credit note to reverse the original output tax and then re‑account for the corrected amount. Credit notes reduce output tax; debit notes increase it where undercharging is corrected.
Key Term: credit note
A document issued by a supplier to correct or cancel all or part of a previously issued VAT invoice.
Common corrections include price changes, returns, discounts applied after invoicing, or correcting VAT rate errors. Corrections should be made in the VAT period when the error is identified and the credit note is issued, maintaining a clear audit trail.
Consequences of Failing to Issue a Valid VAT Invoice
If a business fails to issue a valid VAT invoice, the customer cannot reclaim input VAT, and the supplier may face penalties from HMRC. Inaccurate invoices can also lead to VAT assessments and interest charges. Failure to keep or produce proper VAT invoices undermines input tax claims and may trigger civil penalties for non‑compliance, in addition to the requirement to account for any under‑declared output tax. Persistent or deliberate failures may give rise to more serious sanctions.
Worked Example 1.1
A VAT-registered solicitor provides legal advice to a VAT-registered business client and charges £2,000 plus VAT. What must the solicitor include on the invoice, and why is this important?
Answer:
The solicitor must issue a full VAT invoice showing their name, address, VAT number, the client’s name and address, a unique invoice number, the date, a description of the services, the net amount (£2,000), the VAT rate (20%), the VAT amount (£400), and the total (£2,400). This enables the client to reclaim input VAT and ensures legal compliance.
Worked Example 1.2
A UK law firm supplies legal services to a French business. Should UK VAT be charged, and what must the invoice state?
Answer:
No UK VAT is charged. The invoice should state "reverse charge applies" or "supply subject to reverse charge," and include all other required details. The French business accounts for VAT in France.
Worked Example 1.3
A retailer sells office supplies to a VAT‑registered customer for £150 including VAT. May the retailer use a simplified invoice, and what must it show?
Answer:
Yes. For consideration under £250 (including VAT), a simplified invoice is permitted. It must show the supplier’s name and address, VAT registration number, the date, a description of the goods, and the total amount payable including VAT with the VAT rate used (20%). The customer’s address and net amounts per item may be omitted.
Worked Example 1.4
A law firm bills a client: profit costs £1,500 plus VAT; court fee £350; counsel’s fee £800 plus VAT charged to the firm by counsel. How should these be presented on the VAT invoice?
Answer:
Profit costs are standard‑rated: show £1,500 plus £300 VAT. The court fee is usually a true disbursement (paid as agent for the client), shown separately as outside the scope of VAT with no VAT added. Counsel’s fee is normally part of the firm’s own supply to the client; the firm has incurred input VAT (if applicable) on counsel’s invoice and recharges within its standard‑rated supply to the client. In practice, show counsel’s fee within the firm’s chargeable amount subject to VAT, or clearly state why it qualifies as a true disbursement if the agency conditions are met.
Worked Example 1.5
A UK solicitor advises a private individual in Spain on a personal matter. Does UK VAT apply?
Answer:
Yes. Under the general rule for B2C services, the place of supply is where the supplier belongs (the UK). The invoice should be a full VAT invoice charging UK VAT at 20%.
Worked Example 1.6
A firm completes work on 1 March, issues the VAT invoice on 10 March, and receives a 50% advance payment on 20 February. What is the tax point for VAT?
Answer:
The advance payment on 20 February creates a tax point for that 50% portion. For the remaining 50%, the basic tax point is 1 March, but because the invoice is issued within 14 days, the invoice date (10 March) becomes the tax point for the balance.
Worked Example 1.7
A supplier invoices £1,000 plus 20% VAT (£200). Later a discount reduces the net price by £100. How is this corrected?
Answer:
Issue a credit note referencing the original invoice, reducing the net amount by £100 and VAT by £20. Adjust output tax in the VAT return for the period in which the credit note is issued.
Exam Warning
If a VAT invoice is missing key details, such as the supplier’s VAT number or the correct VAT rate, the customer cannot reclaim input VAT. Always check invoices for compliance. For cross‑border services, first determine the customer’s status (business or consumer) and the place of supply; incorrectly charging UK VAT or omitting a reverse‑charge statement leads to errors in both parties’ VAT treatment. Expenses on legal invoices must be analysed: misclassifying recharges as disbursements can result in under‑declared output tax.
Revision Tip
For SQE1, memorise the mandatory contents of a full VAT invoice and know when simplified or modified invoices are permitted. Practise identifying the tax point and whether an invoice is required within 30 days. Be clear on zero‑rated vs exempt supplies and the reverse charge wording for cross‑border B2B services.
Key Point Checklist
This article has covered the following key knowledge points:
- When a VAT invoice must be issued and to whom
- The mandatory information required on a full VAT invoice
- The differences between full, simplified, and modified VAT invoices
- The correct application of VAT rates to legal and other supplies
- The rules for cross-border supplies and the reverse charge
- The procedure for correcting VAT invoices and issuing credit notes
- The consequences of failing to issue a valid VAT invoice
- Tax point rules, including prepayments and the 14‑day invoice rule, and the 30‑day invoicing expectation
- Distinguishing true disbursements from recharges on legal invoices and how to show them
- Record‑keeping requirements and the role of VAT invoices in input tax recovery
Key Terms and Concepts
- VAT invoice
- input VAT
- tax point
- taxable person
- output tax
- full VAT invoice
- simplified VAT invoice
- modified VAT invoice
- exempt supply
- reverse charge
- place of supply
- credit note
- disbursement