What is an invoice? Invoices explained

The invoicing process is how businesses get paid for their products or services. But what is an invoice? Who needs to send invoices, how do you go about it, and what information should they contain? 

Whether you’re a new business owner getting to grips with what’s expected or you’re in discussions with a supplier, here’s what you need to know about invoices in the UK. 

What is an invoice? Back to basics 

An invoice is a document that breaks down a transaction between a business and a customer. It’s built around two pieces of information: 

• An itemised list of the goods or services the business provided 
• A statement of the amount the customer owes for those goods and services.

This means that invoices serve a few different purposes for businesses, their customers, and HM Revenue and Customs (HMRC). 

First, an invoice is a record of the transaction. The business and the customer can both use the invoice in their accounting. They can also refer back to it if a misunderstanding arises (for example, if the business has to chase the payment). 

Second, invoices are an important part of a business’s financial records. Although you won’t automatically include your invoices when you submit your tax return, they’ll help you to work out your profit or loss while you’re completing it. Along with bank statements, receipts, and till rolls, invoices are also proof of your business transactions, and you’ll need to be able to show them to HMRC if they ever ask you to. 

Finally, if you pay VAT in the UK, HMRC uses invoices to check that the VAT is properly collected on the sales.  

What’s the difference between an invoice and a receipt? 

In the simplest terms, a business issues an invoice before the customer pays them, and a receipt after.

This means that invoices help the customer to check that the amount requested is correct, and give them the details they need to arrange the payment. In contrast, a receipt is proof of purchase they’ve already made.

What’s a proforma invoice? 

Like a regular invoice, a proforma invoice is a detailed breakdown of the cost of goods or services. However, proforma invoices are issued before the goods or services are provided, and they’re used as a detailed cost and delivery estimate rather than as a legally binding request for payment. 

If your business creates this type of invoice to help potential customers make their choice about your services, you need to clearly label them as proforma invoices. It’s also recommended to include the phrase ‘This is not a VAT invoice’ for clarity. 

Does my business have to issue invoices? 

Yes. Even as a sole trader in the UK, you can and should issue invoices to your customers whenever you provide a product or service. 

Your invoice acts as a record of your work, as a reference during a dispute, as a tool for your bookkeeping, and as an essential document if your business is ever audited. It’s also worth remembering that your customers might need you to provide invoices so they can complete their internal processes and pay you for your work. 

You’re also legally obliged to give your customers invoices if you and your customer are registered for VAT. VAT invoices should be provided within 30 days, and there are some extra requirements, which we’ll discuss below. 

What to include in an invoice

Invoices explain what’s being paid for, when it’s due, and who’s being paid. But there’s more to writing an invoice than that. For an invoice to be legally valid, you have to include these specific details: 

• A unique invoice identification number. This differentiates your invoices from one another and makes it easier for you to find them again in the future. The way you number your invoices is up to you. Some businesses begin with the year, and count up from there (for example, 2025-001, 2025-002, etc.), whereas others use invoice numbers generated automatically by their accounting software. 
• The supply date. This is the date that you provided the goods or services. For example, this could be the date you posted the items a customer ordered if you run an online store, or the date that you came to their address if they booked you for cleaning or landscaping services. 
• The invoice date. This is the date you issue the invoice to the customer. 
• The due date. This is the date by which the payment should be made. In the UK, customers have to pay invoices within 30 days or by the payment deadline specified on the invoice (for example, some companies include the phrase ‘Payment due within 14 days’ on their invoices). After the payment deadline, you can choose to charge interest or apply a late fee. 
• Your company name, address, and contact information. This tells the customer who to pay and gives them a phone number or website to turn to if they have questions. If you’re a sole trader, you should include your name as well as your business name, and an address where documents could be sent to you. Limited companies will also need to include their company registration number on the invoice. 
• The name and address of the customer or company you’re invoicing. It’s important to get these details right so the invoice reaches the right person and can be processed quickly. When you’re invoicing a larger company, it’s a good idea to confirm who the invoice should be sent to. For example, some companies will ask you to send the invoice directly to accounts payable rather than to the contact person you’ve been working with on a project.  

• An itemised list of the items you’re charging for. It’s important to break down the cost here and to include specific descriptions of your products or services. For example, a mechanic can’t issue an invoice for ‘Service and MOT, £300’. Instead, the invoice would include lines to show the cost of the MOT, the cost of labour, the cost of the oil and filters, and any other repairs and replacement parts that were used. It’s often appropriate to include the price per unit per hour for each line of your invoice, and it’s essential to add the lines together to show the total amount due.

• Your payment details. This information lets the customer pay you. You should include the name of your bank, the name on your account, your sort code and your account number. 

Companies that are VAT registered in the UK will also include some additional information:

• Your VAT registration number 
• The rate of VAT charged for each item (this is usually 20%, but it can vary depending on what you supply)
• The VAT charged for each item
• The total VAT charged on the invoice. 

This means the bottom of your invoice will have three lines instead of one. You’ll list the subtotal, the total VAT, and the grand total the customer has to pay.. 

Finally, it’s important to know that invoicing requirements can vary a lot from country to country. If your customer is based outside of the UK, you should ask what their rules are. For example, you might need to include the total in their local currency for them to process your invoice, and there may well be differences in the way you record the VAT, if applicable. 

Digital invoicing: what to know

Depending on your business model and the relationship you have with your customers, you can choose to print your invoices and hand them over in person, mail them, or send them as PDF files by email. As long as you include all the information we discussed above (and meet your client’s requirements for processing the invoice), your document will be binding on paper or in digital form. 

At the very least, business owners should have spreadsheets to help them track their invoice numbers and record when their invoices have been paid. However, there are also advantages to using an app or piece of accounting software to help you create and track your invoices. 

Invoicing software can automatically generate invoice numbers, calculate your total, and separate the VAT. All of this can reduce the chance of sending a duplicate invoice, reusing an invoice number, or making a mistake in the amount you request. Some programs will also track the amount of time you worked on a project and automatically generate an invoice for those hours. And the vast majority of programs will also help you record when your invoices are paid, so you can be more organised about tracking your income and following up if your customers are late to pay. 

The app you choose will depend on:

• Your budget, and whether you can stretch to using a paid tool. 
• The number of clients you have and how many invoices the software can handle. 
• Where your clients are based, and whether the software can handle invoicing in different currencies. 
• Your internal needs, and whether you need a simple app for your invoices or a full-fledged accounting tool to track your income and expenses. 

Check out this post for our top choices for invoicing apps: What’s the best app for invoicing? Top 7 picks

How long should you keep invoices? 

Like all important records, you’ll need to store the invoices you issue for six years from the end of the last company financial year. This means you’ll need a system for storing your old invoices, as well as for issuing new ones. By keeping a detailed record of the invoice numbers used for certain clients each year, for example, you’ll be able to easily recall the invoice if you’re asked to do so. 

It’s worth noting that the six-year requirement covers both the invoices you send to your customers and the invoices you get for the items you buy for your business. You can either keep paper copies, scan them and store them digitally, or use accounting software to do this, as long as it meets HMRC’s requirements for accuracy and readability. 

What is an invoice? Quick recap

Whether you run a very small business as a sole trader or a limited company with a large team, invoices are the backbone of your company’s finances. You’ll need to issue these documents – and meet all of HMRC’s requirements – to get paid for your services and to keep an accurate record of your income. 

There are a lot of hoops to jump through when it comes to writing invoices, so it’s important to find a reliable system for creating, tracking, and storing the documents you send. This can take a certain amount of trial and error, but doing it properly helps your clients to pay on time, so you can continue to run your business.