If you’re wondering, “What is an invoice?”, you’re in the right place. Our team at Remitly has created this guide to provide a comprehensive overview of invoices tailored for UK readers.
If you’re an entrepreneur in the UK, managing your cash flow and ensuring timely payments from customers is vital for your business’s success. Invoices are often the primary method businesses use to request payments, making it essential to understand the process thoroughly.
What is an Invoice?
An invoice is a document requesting payment for goods or services. It outlines the amount owed and the terms of payment and details the products or services provided.
Whether you’re a small business owner, bookkeeper, freelancer, or someone looking to bill clients for a side hustle, understanding invoicing and its various types is crucial.
Invoices come in many forms. For example:
- The paper receipts you receive at shops or restaurants are common invoice examples.
- Monthly statements from internet service providers or utility companies are also a form of invoice.
Historically, invoices were paper records with multiple copies. Nowadays, electronic invoices sent via email or apps are more common. These can be printed on demand or stored digitally for convenience.
Read on to explore the types of invoices you might encounter and the tools available for creating and managing them.
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The Basics of an Invoice
An invoice should clearly state that it is an “invoice” on the first page. Beyond that, typical elements include:
Invoice Date
The date the invoice was created and sent to the customer.
Invoice Number
A unique identifier used to track the invoice. Businesses often use sequential numbers for easy reference.
Contact Information
Include the business’s name, address, phone number, and/or email. This information helps the customer contact you with any questions or concerns.
Payment Process and Terms
- Due Date: The final date by which the invoice must be paid. After this, it may incur late fees.
- Grace Period: A short period after the due date before late fees are applied.
- Late Fees: Additional charges for overdue invoices.
- Discounts or Promotions: Any applicable reductions in the total amount.
- Payment Options: Methods such as bank transfers, credit/debit cards, or direct debits.
- Partial Payments: Specify if partial payments are accepted.
Cost Breakdown
Detail the unit price of each item, the total quantity, any shipping or handling fees, and applicable taxes (e.g., VAT in the UK).
Credit Invoice vs. Debit Invoice
Debit Invoice
A debit invoice requests payment for goods or services. This is the most common type of invoice.
Credit Invoice
A credit invoice provides a refund or reduction in the amount owed. Examples include:
- Refunding a customer for returned items.
- Adjusting subscription fees after cancellation.
- Correcting pricing errors.
Different Types of Invoices and Related Forms
Standard Invoice
A basic invoice issued by businesses to clients. It typically includes:
- Business and client contact details.
- Invoice number and date.
- Itemised list of goods/services.
- Payment terms and total amount due.
Proposal or Quote
While not an invoice, a proposal estimates costs and often resembles an invoice format. A final invoice is issued after the work is complete.
Interim Invoice
For larger projects, an interim invoice bills for portions of the work as it progresses. A final invoice summarises the total costs and payments made.
Timesheet Invoice
Used when billing is based on hours worked. Commonly used by:
- Lawyers
- Creative professionals
- Business consultants
- Therapists
Pro Forma Invoice
An initial invoice sent before goods or services are delivered. Often used for customs clearance or as a quotation.
Recurring Invoice
For services or goods billed regularly, such as monthly subscriptions or retainer agreements.
Final Invoice
Summarises the total cost of a completed project, including previous payments.
Retainer Invoice
Issued to collect an upfront payment before starting a project.
Invoice vs. Purchase Order
An invoice is a payment request sent by a seller to a buyer. A purchase order is a document sent by a buyer to a seller to initiate a transaction.
Invoicing Tools and Resources
Efficient invoicing can improve cash flow and simplify bookkeeping. Consider these tools:
- Microsoft Office: Templates in Word and Excel.
- Canva: Design professional, customised invoice templates.
- QuickBooks: Comprehensive accounting software for tracking payments, managing payroll, and creating invoices.
- FreshBooks: Automates invoicing, payment collection, and tax preparation.
How to Collect Payment on an Unpaid Invoice
Identify the Past-Due Invoice
Use accounting software or review records to find overdue payments.
Send a Polite Reminder
Email or post a reminder with the invoice date and number. Maintain a respectful tone to preserve client relationships.
Issue a Final Reminder
If payment is still outstanding, send a follow-up notice referencing the original invoice details.
Contact the Client Directly
Call the client to discuss delays. Partial payments might be an option to resolve the issue.
Take Final Actions
If the invoice remains unpaid, consider:
- Consulting a solicitor to ensure compliance with UK laws.
- Engaging a debt collection agency.
- Assessing late fees or interest (if specified in the original terms).
Notify the customer of your intent to escalate before taking these steps.
FAQs About Invoices
What is the difference between an invoice and a receipt?
An invoice requests payment for goods or services, while a receipt confirms payment has been received.
Do invoices need to include VAT?
Yes, if your business is VAT-registered, invoices should include your VAT registration number and the amount of VAT charged.
How long should I keep invoices?
In the UK, HMRC requires businesses to keep records, including invoices, for at least six years.
Can I send invoices electronically?
Yes, electronic invoices are widely accepted and can save time and costs associated with printing and postage.
Are there penalties for late payments?
Under the UK Late Payment of Commercial Debts (Interest) Act, businesses can charge statutory interest and claim debt recovery costs for late payments.
