A VAT invoice is an invoice that contains information required by the VAT regulations. A VAT invoice can only be issued by a business which is registered for VAT. Where a business is VAT registered, they must issue a VAT invoice whenever they supply goods or services that are liable to the standard rate of VAT or a reduced rate to another taxable person. A VAT invoice must normally be issued within 30 days of the date on which the supply was made.

VAT invoices are important and the business must keep a copy of every VAT invoice that they issue. Likewise, they must keep a copy of every VAT invoice that they receive. VAT invoices are the primary evidence of VAT charged and VAT incurred.

Details that must be included

Every VAT invoice issued must include the following information:

• a sequential number based on one or more series that uniquely identifies the document;
• the time of supply;
• the date of issue of the document (where this is different from the time of supply);
• the name, address and VAT registration number of the supplier;
• the name and address of the person to whom the goods  or services are supplied;
• a description sufficient to identify the goods or services supplied;
• for each description, the quantity of the goods or the extent of the services, and the rate of VAT and the amount payable, excluding VAT, expressed in any currency;
• the gross total amount payable, excluding VAT, expressed in any currency;
• the rate of any cash discount offered;
• the total amount of VAT chargeable, expressed in sterling; and
• the unit price.

It should be noted that different rules apply where a margin scheme is used and the business should follow the rules of the scheme.

Where a business based in Northern Ireland sends an invoice to a person in an EU member state, the VAT invoice must also include the letters ‘GB’ in front of the VAT registration number for cross-border supplies, the registration number of the recipient preceded by the alphabetical code for the relevant EU member state and a reference to the means of transport.

Electronic invoices

VAT invoices may be issued electronically, and electronic invoices offer a number of advantages over paper invoices. Electronic invoicing is the transmission and storage of invoices in an electronic format without duplicate paper invoices.

The information set out above in relation to paper invoices must also be contained in electronic invoices. However, when sending batches of invoices to the same customer, information that is common to the individual batches may be recorded once per batch rather than on each invoice. For example, the customer’s full name could be included on the batch header rather than on each individual invoice.

Retail invoices

There is no requirement to issue a VAT invoice for retail supplies to unregistered businesses. If asked for a VAT invoice and the supply is £250 or less, a simplified VAT invoice can be issued. However, if the supply is more than £250, a full VAT invoice must be provided if requested.

Simplified invoice

A simplified invoice can be issued if the supply is £250 or less showing the supplier’s name, address and VAT registration number, the time of supply, a description of the goods or services and the VAT rate charged for each, the total amount payable including the VAT shown in sterling and the VAT rate charged. Exempt supplies should not be included in a simplified invoice.

Where the value of the supply is more than £250, a full VAT invoice must be issued.

Credit notes

Where a credit note is issued, it must include the same information as the original invoice and sufficient information to identify the original invoice.

Currency

Although the invoice amounts may be expressed in any currency, where there is a positive rate of VAT due in the UK, the total amount of VAT must be expressed in sterling.

There are various ways in which profits can be extracted from a personal or family company. A popular and tax-efficient extraction strategy is to pay a small salary and to extract further profits as dividends as long as the company has sufficient retained profits.

One of the advantages of paying a salary is to secure a qualifying year for state pension and benefit purposes. A person needs 35 qualifying years when they reach state pension age to receive a full state pension and at least ten qualifying years to receive a reduced state pension. If the director does not yet have 35 qualifying years, it is worth paying a salary which is sufficient for the year to be a qualifying year.

A year will be a qualifying year if an individual has qualifying earnings subject to National Insurance that are at least 52 times the lower earnings limit. Payments of salary and bonus are liable to Class 1 National Insurance. By contrast, dividends do not attract National Insurance.

For 2025/26, the lower earnings limit is set at £125 per week. Thus, it is necessary to pay a salary or bonus of at least £6,500 (52 x £125) for the year to be a qualifying year.

Where earnings are between the lower earnings limit and the primary threshold, which for 2025/26 is aligned with the personal allowance at £12,570, primary contributions are payable at a notional zero rate. This means that the director or employee benefits from a qualifying year for state pension purposes without having to actually pay any primary Class 1 National Insurance contributions.

However, the same is not true for the employer. The reduction in the secondary threshold to £5,000 from 6 April 2025 means that the secondary threshold is now below the lower earnings limit and, unless the employment allowance is available to shelter employer contributions, paying a salary equal to the lower earnings limit will come with a secondary Class 1 National Insurance bill.

Personal companies where the sole employee paid above the secondary threshold is also a director do not benefit from the employment allowance. Consequently, where a salary is paid which is of a level which is sufficient for a year to be a qualifying year for state pension purposes, secondary contributions will be payable. On a salary of £6,500 (the minimum needed for a qualifying year), the associated secondary Class 1 National Insurance bill will be £225 (15% (£6,500 – £5,000)).

In a family company where the employment allowance is available, it is possible to pay a salary which is sufficient to secure a qualifying year without an associated secondary Class 1 liability.

Although it is only necessary to pay a salary of £6,500 for the year to be a qualifying year for state pension purposes, if the personal allowance is available in full, it is more tax efficient to pay a salary of £12,570, as the corporation tax deduction on the salary and secondary Class 1 National Insurance will outweigh the secondary Class 1 National Insurance bill.

The liability for self-employed earners to pay Class 2 National Insurance contributions was abolished with effect from 6 April 2024. Now Class 2 National Insurance is a voluntary charge which self-employed earners with profits below the small profits threshold can choose to pay to secure a qualifying year for state pension and benefit purposes. Where a self-employed earner has profits in excess of the small profits threshold, they receive a National Insurance credit if their profits are between the small profits threshold and the lower profits threshold. If their profits exceed the lower profits limit, they will pay Class 4 contributions.

For 2024/25, Class 2 contributions are only payable where a self-employed earner has profits below the small profits threshold (which for 2024/25 is £6,725) and they have opted to pay Class 2 voluntarily. For 2024/25, voluntary Class 2 contributions are payable at the rate of £3.45 per week; an annual liability of £179.40.

The problem

Some self-employed taxpayers have been charged Class 2 National Insurance contributions for 2024/25 in error. The nature of the error depends on their particular circumstances. Some self-employed earners with profits in excess of the lower profits limit (set at £12,570 for 2024/25) have had a Class 2 National Insurance charge of £358.80 added to their account. This is twice the voluntary Class 2 charge for 2024/25. Self-employed earners with profits in excess of £12,570 are liable to pay Class 4 National Insurance on their profits only.

In some cases, the amount added in error is less than £358.80.

Resolving the issue

HMRC have stated that they have taken action to correct the error where the information that they hold has enabled them to do so. Some self-employed taxpayers have also reported that their Self Assessment calculation (SA302) has been amended to revert to the correct liability initially reported on their 2024/25 Self Assessment tax return.

However, incorrect Class 2 National Insurance letters will continue to be sent out until HMRC have resolved the IT issue in September. Once the problem has been resolved, HMRC will correct the remaining accounts showing a Class 2 National Insurance charge in error. Those affected will be notified when this has been done.

Where a payment has already been made in respect of the incorrect Class 2 National Insurance charge, it will either be refunded or a credit will be added to the taxpayer’s Self Assessment account.

Taxpayers have until 31 January 2026 to submit their 2024/25 Self Assessment tax return. Self-employed taxpayers who have yet to submit their return may wish to wait until this issue is resolved before doing so. Where the return has already been submitted, check the calculation and if it is wrong, make sure HMRC correct it.

The tax code is fundamental to the operation of PAYE. An employee’s tax code provides the employer with the information needed to deduct the correct amount of tax from an employee’s pay. There are various types of tax codes depending on an employee’s circumstances.

A tax code is typically made up of numbers and letters.

Most people will have a suffix code comprising a number followed by a letter. The number in a suffix code indicates how much tax-free pay the individual is entitled to for the tax year – the number is their personal allowance for the year, less the last digit. For example, if a person is entitled to the standard personal allowance of £12,570 for 2025/26, the number in their tax code will be 1257.

The number will be different to this if there are deductions in the employee’s tax code, for example, to collect underpaid tax for a previous tax year or to collect the tax due on benefits in kind which have not been payrolled. It may be higher if, for example, the employee makes donations to charity.

The letter in the tax code refers to the employee’s situation and how this affects their personal allowance The following letters may be found in a suffix code:

• L indicates that the employee is in receipt of the standard personal allowance;
• M indicates that the employee has received the marriage allowance;
• N indicates that the employee has transferred £1,260 of their allowance to their spouse or civil partner; and
• T indicates that the code includes other calculations to work out the employee’s personal allowance. This may be used where the personal allowance is spilt between more than one job and/or pension.

For 2025/26 a person in receipt of the standard personal allowance with no deductions will have a tax code of 1257L. A person who has received the marriage allowance and has no deductions in their code will have a tax code of 1383M, while their spouse/civil partner will have a code of 1131N.

There are also special codes. Code 0T indicates that the employee has no personal allowance. It may also be used where an employee starts a new job and the employer does not have the details needed to give the employee a tax code.

Code BR indicates that all income from this job or pension is to be taxed at the basic rate. This may be the case if the person has more than one job or pension and the personal allowance is allocated fully to another job or pension. Code D0 indicates that all income from the job or pension is taxed at the higher rate, while code D1 indicates that all income from the job or pension is taxed at the additional rate. Similar codes for Scottish taxpayers indicate all income is taxed at the relevant Scottish rate.

If the deductions in the employee’s code exceed their allowances, the employee’s code will have a K prefix. The number element is additional pay added to their actual pay when working out their tax rather than their tax-free pay.

An S prefix indicates that the taxpayer is a Scottish taxpayer and the Scottish rates of tax apply, while a C prefix indicates that the taxpayer is a Welsh taxpayer.

Emergency codes

If the code is followed by ‘W1’, ‘M1’ or ‘X’, it is an emergency code, for example 1257L M1. The code is applied on a non-cumulative basis. Emergency codes are temporary and are usually updated when HMRC have sufficient information.

Updating a tax code

It is important to check that your tax code is correct. You will see it on your payslip. You can also find it on your HMRC app. If you think that your tax code is wrong, you can update it using HMRC’s check your income tax online service (see www.gov.uk/check-income-tax-current-year).

Employers have a duty to enrol eligible staff in a pension scheme. Staff are eligible if they are aged between 22 and state pension age and earn more than £192 per week (£833 per month).

Where an employer takes on seasonal or temporary staff, they must still assess them. However, the assessment will need to take into account that the worker may only work for the employer for short periods of time, they may join and leave in the middle of pay periods and their earnings and hours may vary. The employer can use postponement to delay the assessment.

Staff working for less than three months

Where staff are taken on for less than three months, the employer can either assess them each time they are paid and enrol them in a qualifying pension scheme if they meet the eligibility criteria or make use of postponement. Under postponement, the employer can delay working out who to enrol for up to three months. An employer can only use postponement if they are within six weeks of the date on which the worker met the age and earnings criteria for automatic enrolment.

Employers who opt to use postponement must write to the workers to let them know that they are using postponement. This must be done within six weeks of the start of the postponement period. If the worker leaves before the three-month period is up, the employer is spared the need to assess them and enrol them in a pension scheme. However, eligible staff can request that the employer enrols them during the postponement period.

Staff working for more than three months

Where temporary or seasonal staff are employed and the expectation is that they will work for the employer for more than three months, the employer can either assess the staff each time they are paid and enrol them in a qualifying pension scheme if they are an eligible employee or they can use postponement. However, where they work for more than three months, postponement delays the enrolment of eligible staff rather than removing the enrolment obligation.

Postponement can run from the date that the employee started work or, if later, the date on which the employee met the age and earnings criteria for automatic enrolment.

At the end of the three-month period, the employer must assess those staff to see if they are eligible employees, and if they are, enrol them in a qualifying pension scheme straight away. Where a worker is not an eligible employee, the employer can again use postponement to delay assessing them for a further three months.

Workers who meet the eligibility criteria can request that the employer enrols them in a qualifying pension scheme during the postponement period.

The tax exemption for trivial benefits is a useful one as it allows employers to provide certain low-cost benefits to employees without an associated tax or National Insurance liability, such as Christmas or birthday gifts. However, not all benefits qualify, and there are some pitfalls to be wary of.

What is a ‘trivial benefit’?

To qualify as a trivial benefit, the following conditions must be met.

1. The benefit is not cash or a cash voucher. A cash voucher is one that can be exchanged for cash.
2. The benefit cost is not more than £50.
3. The benefit is not made available under a salary sacrifice arrangement or pursuant to a contractual entitlement.
4. The benefit is not provided in recognition of particular services performed by the employee in the course of their employment or in anticipation of such services.

Where the employer is a close company (as is the case for most personal and family companies), the total value of tax-free trivial benefits provided in the tax year to a person who is a director or officeholder of that company or to a member of their family or household is capped at £300 a year.

Calculating the benefit cost

A benefit can only be a trivial benefit if the benefit cost does not exceed £50. The benefit cost will normally be the cost of providing the benefit. However, where the benefit is made available to more than one employee and it is impracticable to calculate the cost of providing it to each individual, the benefit cost is the average cost of providing the benefit. This is simply the total cost of providing the benefit divided by the number of people to whom it is provided.

Pitfall 1 – Rewarding service

While providing a bunch of flowers or a bottle of wine as a thank you when an employee works late might be a nice gesture, it is not one that falls within the ambit of the trivial benefits exemption as the gift is made to reward services provided by the employee. Likewise, if you provide an employee with a taxi home if they work late and the exemption for late night taxis is not in point, the trivial benefits exemption will not apply even if the fare is less than £50 as again the taxi home is provided as a ‘reward’ for working late.

Pitfall 2 – Salary sacrifice arrangements

The trivial benefits exemption cannot be used in conjunction with salary sacrifice arrangements.. If the employee gives up cash salary in return for a non-cash benefit, the trivial benefits exemption will not apply, even if the cost of the benefit received in exchange is not more than £50.

Pitfall 3 – Contractual obligations

The exemption does not apply to benefits to which the employee is contractually entitled. This applies not only to those explicitly stated in the employment contract, but also where there is an implied contractual arrangement. HMRC illustrated this with the somewhat extreme example of cream cakes being provided every Friday, which they argued created an implied obligation and, as such, the provision of the cakes would fall outside the scope of the trivial benefits exemption.

Pitfall 4 – Recurring benefits

Problems can arise if an app, season ticket or gift card is used to provide the employee with regular benefits. Where this is the case, the benefit cost is the annual value of providing the benefit, rather than the cost of each individual benefit. Consequently, where the annual cost is more than £50, the trivial benefits exemption will not apply, even if the cost of each individual benefit does not exceed the limit. For example, if an employee is given an app which allows them to book a monthly beauty treatment at a cost of £40, the trivial benefits exemption will not apply as, at £480, the total cost of using the app during the tax year is more than the trivial benefit limit of £50; it does not matter that each individual treatment only costs £40.

Personal and family companies often make loans to directors. However, there can be tax and National Insurance implications of doing so. Where the loan remains outstanding nine months and one day after the end of the accounting period in which it is made, a tax charge arises on the company. Tax charges may also arise if the loan is written off.

HMRC have recently written to individuals who between 6 April 2019 and 5 April 2023 received a director’s loan that has been released or written off and who may not have declared the amount written off as income on their Self Assessment tax return. Individuals affected can tell HMRC about the loan using their online disclosure service (see www.gov.uk/guidance/tell-hmrc-about-underpaid-tax-from-previous-years). An individual’s agent can make the disclosure on their behalf.

Where a loan was written off after 5 April 2023 and not declared on the Self Assessment tax return, there is no need to use the disclosure service; instead, the tax return can be amended.

Tax consequences

Where a director’s loan is written off, there are implications for the company and the director. If the loan is one in respect of which the company has paid tax (section 455 tax) because the loan was outstanding nine months and one day after the end of the accounting period in which the loan was made, the write off will be treated like a repayment as far as the company is concerned. This means that the company is able to apply for a repayment of the associated section 455 tax. The repayment can be claimed nine months and one day after the end of the accounting period in which the loan was written off. This can be done online (www.gov.uk/guidance/reclaim-tax-paid-by-close-companies-on-loans-to-participators-l2p). The company must declare the loan write-off on the supplementary pages of its company tax return.

As far as the director is concerned, the amount written off is treated as a distribution and taxed at the dividend tax rates. The director should declare the amount written off on their Self Assessment tax return.

Where the director is also an employee there is also a potential charge under the employment income rules. However, the dividend treatment outlined above takes precedence so there is no double charge.

National Insurance implications

The National Insurance position is more complex. Where the loan is derived from an employment, Class 1 National Insurance (employer and employee) will be due as the write-off is treated as earnings for National Insurance purposes rather than as a dividend (on which no National Insurance is due). HMRC will generally assume this to be the case.

An alternative scenario is that the write-off is shareholders’ funds rather than earnings and is not related to the director’s work for the company. If this is accepted to be the case, there will be no National Insurance to pay. To provide weight to this argument, the write-off should be approved at a general meeting of the shareholders or by a written resolution. However, it should be noted that HMRC may issue a successful challenge.

Alternative approach

Rather than writing off the loan, if the company has sufficient retained profits it would be better to pay the director a dividend which could then be used to clear the loan. The income tax position will be the same, but as there is no National Insurance liability on dividends, the National Insurance issue is avoided.

It is easy to make mistakes when completing your VAT return. However, where mistakes are made, it is important to correct them. This is fairly straightforward to do.

Four-year window

You can correct errors in your next VAT return if the error was made in the preceding four years and it is either less than £10,000 or between £10,000 and £50,000 but less than 1% of your total sales value.

Errors that are more than £50,000 or more than £10,000 and greater than 1% of the total sales value must be notified to HMRC separately, as must deliberate errors. This can be done using form VAT652 or online. HMRC have a tool which you can use to see which method is appropriate for you (see www.gov.uk/guidance/check-if-you-need-to-report-errors-in-your-vat-return).

The net value of the error is the additional tax due to HMRC less any tax that is due to you from HMRC.

Adjusting your next VAT return

If your error falls within the limits permitted for correction in your next VAT return, the action that you need to take depends on whether, as a result of the error, you owe VAT to HMRC or HMRC owe you VAT. Where you owe VAT to HMRC, you need to add the amount of the error to the box 1 figure. Where HMRC owe VAT to you, the error is added to the box 4 figure. You will also need to keep details of the error, including how it arose, when it was discovered and the amount of VAT involved. You will also need to correct your VAT account.

Interest and penalties

If the error results in VAT being due to HMRC, interest and penalties may be charged. Where VAT is paid late, interest is charged from the date on which it was due to the date on which it was paid. If the payment is made more than 15 days late, late payment penalties will also apply.

If the error results in a VAT repayment, repayment interest may be paid.

Simple Assessment is used by HMRC to collect tax underpayments from taxpayers with straightforward tax affairs. It removes the need for the taxpayer to complete a Self Assessment tax return.

HMRC will issue a Simple Assessment where there is an underpayment of tax which cannot be collected through PAYE. Each year HMRC undertake a PAYE reconciliation process and issue a P800 calculation. Where this shows that tax is owing which cannot be recovered through PAYE, they may issue a Simple Assessment. A Simple Assessment letter will be sent by post or issued to the taxpayer’s personal tax account if they have one. The letter will show the taxpayer’s taxable income, tax that has been paid and the amount that is owed.

Check if it is correct

It is important to check that the figures in the Simple Assessment are correct – HMRC can, and do, make mistakes. You should check the amounts shown in the Simple Assessment against your P60, bank statements, letters from the Department for Work and Pensions, and similar. If you do not understand the figures, it is prudent to take advice.

If you think the calculation is wrong, you should tell HMRC, either by writing to them or by calling them. You must do this within 60 days of the date on the letter. You should tell HMRC which figures you think are wrong and what you think they should be. If HMRC agree with you, they will send you a new Simple Assessment with the revised figures. If they think their figures are correct, they will send you a decision letter explaining why. If you still do not agree with them, you can appeal. This must be done within 30 days of the date on which the decision letter was issued.

Payment must still be made on time while the appeal is dealt with unless HMRC instruct otherwise.

Paying your Simple Assessment

Tax owed under Simple Assessment can be paid online, by bank transfer or by cheque. The date by which payment must be made depends on the date on which the Simple Assessment letter was received. Where the letter for the 2024/25 tax year is received before 31 October 2025, payment must be made by 31 January 2026. Where the letter for 2024/25 is not received until after 31 October 2025, payment must be made no later than three months from the date on the Simple Assessment letter.

Interest will be charged on payments made late.

If you are running a business, regardless of whether you operate as a sole trader, in partnership or the business is run as a limited company, you will need to register for VAT if your total taxable turnover in the previous 12 months exceeds the VAT registration threshold of £90,000 or if you expect your taxable turnover to be more than £90,000 in the next 30 days.

If both you and your business are based outside the UK and you supply goods or services to the UK (or expect to do so in the next 30 days), you must register for VAT regardless of your taxable turnover.

Taxable turnover

The trigger for registration for a UK-based business is its taxable turnover. For VAT purposes, this is everything that is not exempt from VAT or outside the scope of VAT. It includes zero-rated goods; reduced rate goods and goods charged at the standard rate. In working out your taxable turnover, you must also take into account:

• goods hired or loaned to customers;
• business goods used for personal reasons;
• goods received in barter or part-exchange or as gifts;
• services from other countries that are subject to the reverse charge;
• goods and services subject to the domestic reverse charge; and
• building work over £100,000 that the business did itself.

Registration deadline

Where taxable turnover in the previous 12 months exceeded £90,000, the business must register for VAT within 30 days of the end of the month in which the threshold was exceeded. The registration is effective from the first day of the second month after which the threshold is exceeded.

Example

Bella is a sole trader. On 7 July 2025 her VAT taxable turnover in the previous 12 months exceeded £90,000 for the first time. Bella must register for VAT by 30 August 2025. Her registration is effective from 1 September 2025.

Where taxable turnover will exceed the VAT registration threshold in the next 30 days, the business must register for VAT by the end of that 30-day period. The registration is effective from the date that the business realised that the threshold would be exceeded.

Example

Cameron signs a contract to deliver goods worth £102,000 on 17 July 2025. He must register for VAT by 16 August 2025. His registration is effective from 17 July. He must therefore charge VAT on those goods.

Where a business registers late, it must pay VAT on taxable goods and services supplied after the date by which it should have registered. A late registration penalty may also be charged.

Businesses which exceed the threshold temporarily can apply for a registration exception.

Registration process

A business can register for VAT online (see www.gov.uk/register-for-vat/how-register-for-vat). The information required will depend on whether the business is run by an individual or as a partnership, or by a company.

To register as an individual or partnership, you will need your National Insurance Number, an identity document (such as a passport), bank account details, your unique taxpayer reference (UTR), details of your annual turnover and an estimate of your taxable turnover for the next 12 months. For a company registration, the company registration number, bank account details, UTR, annual turnover and estimated turnover for the next 12 months will be required.

In certain circumstances it is not possible to register online and registration must be done by post, such as if you are applying to join the agricultural flat rate scheme.

Voluntary registration

A business whose taxable turnover is below the VAT registration threshold can register for VAT voluntarily. If you do this, you will need to charge VAT on taxable supplies that you make, but you can claim back VAT on things that you buy for your business. Voluntary registration is worthwhile if you make zero-rated supplies but incur VAT on items that you buy.