For many people, the idea behind going into a digital business created a mental picture like this:
Being a digital entrepreneur opens up possibilities. It brings dreams of a nomadic lifestyle and the opportunity to work on your own terms.
All of these things are possible, but, unfortunately, we also have to deal with the less “sexy” side of business if we want it to be successful and sustainable. Accounting. Invoicing. Rules.
It can be tempting to bury your head in that lovely-looking sand beneath the hammock, but if you want to stay in business without any trouble, there are a few things you should know about invoicing.
Do I Always Need To Invoice?
In short, no. Not every country requires you to. For example, in the U.S.A. there are no overriding legal requirements for invoicing of customers, though there are some state-by-state variations. Generally speaking, a lot of digital businesses in the U.S. don’t issue a proper invoice at all, though some may issue the standard, automatic digital receipt as turned out by their payment provider.
A receipt and an invoice are not the same thing, however. Invoice (as defined by the Merriam-Webster Dictionary) means: “an itemized list of goods shipped, usually specifying the price and the terms of sale.”
As you can see from the Square receipt, there is no itemizing at all, simply an acknowledgment of the payment amount received. If you only sell within the U.S. or any other country that doesn’t specify invoicing by law, then no, you don’t have to invoice. But the question then becomes, should you?
Apart from being compliant with laws where required, invoicing can actually have other advantages for your business. Itemizing every charge, including any taxes, helps to create transparency for the customer and give them trust in your business.
It’s also a more professional look – with that Square receipt you can’t see any branding, terms, or contact details for the business. In fact, the receipt could have come from anyone. At least with proper branding you appear to be a professional organization, plus it could help promote your brand (you don’t know who will end up handling your invoice!).
What Should My Invoice Include?
The requirements for invoicing can be different from country to country, but here is a general list of what to include (some will be legal requirements, some are simply preferable – you’ll need to check):
- A unique invoice number.
- Your business name and contact details.
- Your logo.
- Your tax number, VAT number, or business registration number (a variable dependent on country).
- Transaction date.
- Customer’s name and contact details
- Due date (if not paid upfront).
- Breakdown of items and their unit cost plus total.
- Any tax charged.
- Total invoice amount.
- Any discounts applied.
- Any payment terms you may have.
- Some kind of note, thank you, or friendly reminder.
How To Be Compliant For Different Countries
Things would be so much simpler if there were a “one size fits all” approach that businesses could take for invoicing. Unfortunately, that’s simply not the case due to the different rules of each jurisdiction. Most will require the elements listed in the previous section, but here are some additional requirements:
The E.U. members are among countries who require the charging of VAT (value added tax) in the sale of products and services, including digital products or any others sold online.
This means there are also special invoicing requirements such as:
- Charging and itemising VAT according to the country of residence of the consumer.
- Showing your VAT number.
- Showing the VAT number of the customer (which proves they are a business in the case of the “reverse charge 0% mechanism”).
- Nature and type of services provided.
To top that off, each member state has their own VAT rates and rules around any exemptions. Your invoicing needs to be correctly set up for each place, because not only do you use the invoice to collect the correct amount of VAT required, but your customer could be using the invoice to claim back VAT. It is at this point that you could be caught out if your invoices haven’t been created correctly.
Another point of note in the E.U. is that the European Commission wants digital invoices to be the conventional way of invoicing by 2020. So if you currently ship physical goods and still include a paper-based rather than digital invoice, now is a good time to be looking at a digital solution if you sell within the E.U.
If you are an Australian-based business, or a foreign-based business doing business from within Australia, then you are required to charge GST (goods and services tax) on all sales which must be itemised on an invoice.
If you are foreign-based but selling goods online to Australians with a value of more than AUD$1000, you may also be required to charge GST.
Canada is another country where GST is required for certain sales and they have invoicing requirements which apply to different tiers of sales minimums, as shown in the table below:
_You may also be required to obtain and provide a supplier number on invoices so that Canadian customers are able to claim rebates or tax credits. This would be something to check out with an accountant who is conversant with Canadian law.
Tax invoices have to be issued to all Singapore-based customers who are registered for GST. Again, they use these to claim tax rebates or credits. A tax invoice need not be issued for zero-rated supplies, exempt supplies, and deemed supplies or to a non-GST registered customer.
If all of this seems like a confusing, compliance nightmare, then one of the best things you can do is consult with an accountant or tax lawyer who specialises in international business. In the case of invoicing though, you are generally better to supply a more complete invoice just in case, rather than a cut back version which may leave out key requirements.
How Do I Comply?
You’ve got a couple of options, really. You could choose to restrict doing business to one or two areas where you are familiar and can easily comply with invoicing rules. Depending on the kind of software you use, you can usually do this by excluding countries in the shipping addresses section of your set up.
No one really wants to have to manually comply with invoicing requirements, so if you want to remain open, your only other option really is to choose invoicing software which will automatically comply you with requirements for the main countries you sell into.
So, I Need To Adjust My Invoicing?
The answer to the title question is yes. If you’re doing business online and selling to customers in different countries, you will need to comply with any local regulations for invoicing.
In some countries, there are no legislative reasons to invoice and you could get away with the standard receipt that payment gateways often produce. However, invoicing properly does add a level of professionalism to your business in the eyes of your customers.
Our favored solution? Get it done automatically. Find invoicing software that will automatically produce invoices which comply with the laws of the countries you sell within.
Note: At Quaderno we love providing helpful information and best practices about taxes, but we are not certified tax advisors. For further help, or if you are ever in doubt, please consult a professional tax advisor or the Tax Agency.