Contractor guide to self-billing
When you are contracting, you may come across the expression ‘self-billing arrangement’ or ‘self-billing agreement’. Here, exclusively for ContractorUK, I will clarify what these potentially opaque terms mean for the typical contractor, writes Graham Jenner, founder of accountancy firm Jenner and Co.
What is a self-billing arrangement?
Under the arrangement, the agency (or end-client) will, effectively prepare your invoice for you. In other words, they bill themselves, on your behalf. They then forward a copy to you for your records.
Most self-billing arrangements are set up under the VAT regulations.
Does this mean that a self-billing arrangement only applies if I am VAT-registered?
Many agencies and some end-clients will have a self-billing arrangement in place with their VAT-registered suppliers. If you are not VAT-registered, they may ask you to enter into a self-billing arrangement with them anyway, simply because their systems are geared up to deal with invoices from suppliers in that way. If you are not VAT-registered, any self-billing agreement will not be covered by the VAT regulations.
Why do agencies often self-bill?
Agencies typically like a self-billing arrangement as it removes the need to wait for an invoice from the contractor; check it against their records; check it against the approved time sheet from the end-client, then potentially request amendments before, finally, processing on the system. Instead, with self-billing, they can simply raise their invoice to their client and, at the same time, raise the self-billing invoice to themselves, both based on the same client-approved timesheet.
As a large proportion of their ‘supplies’ are from contractors, the agency can prepare the self-billing invoices in a consistent manner. And it makes processing much more straightforward.
Why are direct clients less inclined to want to self-bill?
If you work directly for an end client, unless they have a large number of contractors, they are probably not geared up to self-billing.
Are there benefits for contractors if the agency self-bills?
As you do not need to raise an invoice and meet any deadline for submitting it to the agency, there is, perhaps, less risk of not getting paid due to the invoice not being received on time.
There is also less likelihood of inaccuracy, as the agency will use the same data (client-approved timesheet etc.) to prepare their invoice to the client, and their self-billing invoice for your supply to them.
Finally, the self-billing agency will then, typically, make payment for all their self-billed invoices on the appropriate day.
Is a formal agreement needed?
If you and the agency are both VAT-registered then the arrangement is covered by the VAT regulations and a formal agreement is needed.
Otherwise, no formal agreement is required, though it is likely that one will be prepared or included within the standard contract.
Under the VAT regulations, the agreement is a legally binding document so it needs to include the following:
- Your agreement that the agency can issue invoices on your behalf.
- Your agreement that you will not issue VAT invoices for services covered by the agreement.
- An expiry date (often 12 months from the start but it could be the date that any business contract is likely to end).
- Your agreement that you will let the agency know if you cease to be VAT-registered or obtain a new VAT registration number (N.B. the latter would require a new agreement).
- Details of any third-party that the agency intends to outsource the self-billing process to.
Who is responsible for the accuracy of the self-billing invoice?
Part of the agreement is that you will accept the invoices your customer raises on your behalf for the duration of agreement. It is down to the agency to make sure that the invoice contains the correct information and is correctly issued.
However, contractors should still check the self-billing invoices you receive. If you spot an error, you should let the agency know, so that they can issue correcting paperwork. Note, you cannot issue your own ‘correction’ invoice or credit note.
What happens if I cancel my VAT-registration?
If you enter into a self-billing agreement with an agency but you later cancel your VAT registration, you will need to notify the agency immediately. They may continue to self-bill but without VAT, as their systems are geared up for self-billing.
Does the arrangement cover all invoices?
Any charges from you to the agency during dates covered by the arrangement must be on a self-billing basis.
Remember to include the invoice in your outputs on your VAT Return
It is quite easy to mistake a self-billing invoice for a purchase invoice and to accidentally include it in Input VAT (purchases) instead of Output VAT (sales).
You may see a statement on self-billing invoices you receive, such as
“The VAT shown is your output tax due to HMRC”.
This inclusion is made on the advice of HMRC, to try to avoid such mistakes. In addition the invoice should clearly state “SELF-BILLING INVOICE”.
Do I have to agree to a self-billing agreement with the agency?
While an agency cannot force you to enter into a self-billing agreement with them, they may make it a condition of doing business with you.
Keep a copy
You should keep a copy of any self-billing agreement that you enter into, with an agency.
Lastly, don’t assume it’s a self-billing arrangement
If you have been providing services via a self-billing agency, it is very easy to get out of the habit of raising an invoice. However, if you start working through a new agency that isn’t self-billing, they will set a submission deadline for your invoice.
So, don’t assume a new agency is self-billing – check at the outset. Indeed, if you haven’t signed a self-billing agreement by the time your first invoice is due, issue an invoice anyway – you can always cancel it, if the agency puts a self-billing agreement in place – but at least you won’t have risked missing a deadline for payment.