1. What is a VAT/GST Invoice?
A VAT (Value Added Tax) or GST (Goods and Services Tax) invoice is more than just a request for payment. It is a legal document that serves as the primary evidence for tax authorities.
For the seller, it documents the output tax collected. For the buyer (if they are a business), it is the mandatory proof required to reclaim "Input Tax" credits. If an invoice lacks specific mandatory information, tax authorities can refuse these deductions, leading to financial penalties.
2. The 8 Mandatory Requirements of a Tax Invoice
While specific laws vary, international accounting standards require these 8 core elements. Ensuring these are present protects both you and your client.
| Element | Why It is Required |
|---|---|
| 1. Unique Invoice Number | Must be sequential and unique (gapless) for audit trails. Learn more about numbering. |
| 2. Issue Date & Tax Point | Determines which tax period (quarter/month) the VAT belongs to. |
| 3. Supplier Details & Tax ID | Name, Address, and your VAT/GST Registration Number. |
| 4. Customer Details | Legal Name and Address. (Plus their Tax ID for B2B). |
| 5. Description of Goods | Clear identification of what is being sold (not just "Services"). |
| 6. Net Amount (Subtotal) | The price of goods before tax is applied. |
| 7. Tax Rate & Amount | The specific rate applied (e.g., 20%) and the exact tax value calculated. |
| 8. Total Amount Payable | The final gross amount (Net + Tax). |
3. Visual Example: Anatomy of Compliance
Below is an example of a fully compliant VAT invoice generated with our tool. Notice how the tax elements are clearly separated to meet audit standards.
4. Global Rules: UK, EU, Australia & Canada
Tax rules are local. Here are the specific requirements for major jurisdictions:
🇬🇧 United Kingdom (VAT)
- Authority: HMRC
- Threshold: £85,000 turnover.
- Key Rule: If the invoice is for £250 or less, you can issue a "Simplified Invoice" (retailers). For B2B, a full VAT invoice is required.
🇪🇺 European Union (VAT)
- System: EU VAT Directive.
- Cross-Border: B2B sales between EU member states use Reverse Charge (0% VAT). Both VAT numbers must be valid (check via VIES).
- Currency: VAT amount must be expressed in the local currency of the supplier.
🇦🇺 Australia (GST)
- Authority: ATO
- Threshold: $75,000 AUD turnover.
- Key Rule: For sales over $1,000, the buyer's identity and ABN (Australian Business Number) must be included.
🇨🇦 Canada (GST/HST)
- Authority: CRA
- Threshold: $30,000 CAD.
- Key Rule: You must display your BN (Business Number). Rates vary by province (5% to 15% HST).
5. B2B & The Reverse Charge Mechanism
The Reverse Charge Mechanism is the most critical concept for cross-border B2B service providers (e.g., a freelancer in Germany billing a company in France).
Decision Tree: Should I Charge VAT?
Requirements for Reverse Charge Invoice:
- Client's VAT Number: You must verify and include the customer's valid VAT number.
- No Tax Charged: The VAT rate line should be 0%.
- Mandatory Statement: You must include a note: "VAT Reverse Charge applies - Customer to account for VAT to their tax authority."
Our VAT Invoice Generator allows you to set the tax rate to 0% and add these legal notes instantly in the footer.
6. Top 5 Compliance Mistakes & Penalties
Avoid these common errors that trigger tax audits and fines:
- Calculation Errors: Calculating VAT on the gross amount instead of the net. (e.g., 20% of 120 is not 20).
- Missing Customer Tax ID: Applying Reverse Charge without collecting the client's valid VAT number makes you liable for the tax.
- Incorrect Currency Conversion: If billing in a foreign currency (e.g., USD), the VAT amount must also be shown in your local currency using the official daily exchange rate. Read more on Multi-Currency Invoicing.
- Billing the Wrong Entity: In corporate groups, billing the Parent Company instead of the local subsidiary can invalidate the VAT reclaim.
- Modifying Invoices: Once issued, a VAT invoice cannot be deleted. You must issue a Credit Note to correct it.
7. Special Rules: Digital Services (OSS/MOSS)
If you sell digital products (e-books, software, courses) to consumers (B2C) in the EU, you cannot charge your local VAT rate. You must charge the VAT rate of the customer's country.
- Place of Supply: Is determined by the customer's location (verified by IP address or billing address).
- OSS (One-Stop Shop): Instead of registering in every EU country, you register for OSS in one country and report all EU sales in a single return.
- Invoicing: Your invoice must show the VAT rate of the consumer's country (e.g., 21% for a Spanish customer, even if you are in France).
8. How to Create a Compliant Invoice (Step-by-Step)
Follow this workflow using our free generator to ensure you never miss a compliance check.
- Identify Tax Status:
Determine if your client is a Business (B2B) or Consumer (B2C) and if they are domestic or international. This dictates the tax rate.
- Enter Registration Numbers:
Input your VAT/GST number in the "From" section. If B2B cross-border, input the client's valid Tax ID in the "To" section.
- Classify Line Items:
List your services. If you have mixed items (some taxable, some exempt), use a tool that allows per-item tax toggling.
- Apply Legal Statements:
If applying 0% VAT (Reverse Charge), add the required legal text in the "Notes" field.
- Generate Final Document:
Download the PDF. Ensure the "Tax Amount" is clearly visible and separated from the subtotal.
9. Frequently Asked Questions
Is the supplier's VAT/GST number mandatory on an invoice?
Yes. In almost every tax jurisdiction (UK, EU, Australia, Canada), a business registered for VAT/GST must clearly display its registration number on all invoices. Omitting this invalidates the invoice for tax deduction purposes.
When do I need to include the customer's VAT number?
You must include the customer's VAT number primarily for B2B cross-border transactions (e.g., within the EU) to apply the 'Reverse Charge' mechanism. It is also good practice for domestic B2B sales to ensure accurate tax reporting.
What is the difference between 'Zero-Rated' and 'Exempt'?
Both result in 0% tax on the invoice, but they differ legally. 'Zero-rated' goods (like children's clothes in the UK) are taxable at 0%, meaning you can reclaim input VAT. 'Exempt' goods (like insurance) are not taxable, meaning you cannot reclaim input VAT related to them.
What happens if I issue a non-compliant invoice?
Issuing a non-compliant invoice can lead to delayed payments (as clients cannot reclaim tax), administrative fines from tax authorities, and interest charges on unpaid VAT. It is critical to use a compliant template.
Disclaimer: This guide is for informational purposes only and does not constitute professional tax advice. Tax laws (VAT, GST, Sales Tax) vary by country and change frequently. Always consult with a qualified accountant or tax advisor regarding your specific business circumstances.