If there are two wishes businesses have for their invoicing processes, it’s cutting down the workload and getting paid faster.
To accomplish both in one change may seem like a pipe dream, but that’s not the case: self-billing allows businesses to save time on invoicing and potentially improve cash flow.
However, it’s not a blanket solution to every business. Once you understand what it is and how it works, you’ll know whether it’s the answer for you.
What is self-billing?
Self-billing, also known as self-invoicing, is a process where the customer—rather than the supplier—creates and issues the invoice for goods or services received. This method is typically used when both parties agree in advance and the customer has better insight into the value of what’s being supplied.
Before this happens, both parties must be registered for Value-Added Tax (VAT). Additionally, the agreement requires a formal agreement that outlines the terms, conditions, and responsibilities of both parties.
The agreement should also outline the goods or services covered by self-billing, the pricing structures, VAT rates, and the duration of the agreement.
How self-billing works
Self-billing can be broken up into three components.
The self-billing agreement is established
When both parties agree that they can benefit from a self-billing agreement, it needs to be formalized in a document. The document needs to outline the:
- Goods or services to be self-billed
- Pricing structure of the goods or services
- VAT rates to be applied
- Invoice timing
- Payment terms
- Process of disputing an invoice or billed amount
- Duration of agreement
The document should be signed and dated to show both parties consent to the terms and the period of time the self-billing agreement covers.
Transactions are processed
Once the agreement is active, the responsibilities of the supplier shift. They’re still responsible for delivering goods or services on the agreed-upon terms, but the invoicing responsibilities are now in the hands of the customer.
The customer invoice must include all the information required to be a valid VAT invoice. This includes:
- The supplier’s business information
- The customer’s business information
- An itemized breakdown of the goods or services provided, including quantities and unit prices
- A description of each good or service
- Applicable VAT rates and amounts
The customer retains the invoice for their records. They send a copy of the invoice along with the payment to the supplier.
Recordkeeping is updated and VAT processed
Once the invoice and payment are received, the recordkeeping needs to be updated, including the VAT amount. This means adding the VAT to your accrued amount for remittance to the tax authorities.
Both parties need to retain a copy of the invoice for tax and audit purposes. Whether it be in physical form or digitally on the cloud, keep all self-billing invoices and a copy of the original agreement in a safe place.
VAT regulations in self-billing
It’s clear that VAT registration and reporting are a significant part of the self-billing process, so let’s dig into what they mean.
VAT registration requirements
Both the seller and the customer should be registered for VAT throughout the period outlined in the self-billing agreement. This is because both parties need to understand and be able to complete the VAT calculations.
Given that the seller is trusting the buyer to complete the VAT calculation, it’s a benefit to have them familiar with the VAT process and calculation.
Losing the VAT registration could void the self-billing agreement. Notify the buyer immediately and return to the traditional billing structure until the situation is sorted.
Invoice validation
Every invoice the supplier receives should be reviewed for accuracy, especially in the early days. Always ensure the invoice accurately reflects what was purchased and that the calculations were done correctly.
Even something as small as a typo could cause complications with compliance. The supplier should take additional time to be thorough with their reviews for the first few invoices so the customer has a successful template to work off of going forward.
Ongoing compliance with VAT regulations
Once the self-billing agreement is in effect, take the following precautions to ensure you’re staying compliant with VAT reporting regulations:
- Keep the self-billing agreement in a safe place and readily available
- Communicate any changes in your VAT registration (such as a registration number) as soon as they happen
- Only create invoices if you are a buyer in the self-billing agreement
- Only accept self-billing invoices from customers you have a formal agreement with
- Verify the accuracy of all information included in the invoice
- Double-check the VAT calculations for accuracy
Advantages of self-billing
Both the supplier and the customer can benefit from a self-billing agreement. Here’s how.
Time savings
The supplier no longer has to worry about generating invoices on every sale. This reduces any administrative costs while streamlining what would otherwise be a manual process.
Improved cash flow and payment speed
The customer can only begin their accounts payable process when the invoice is received. For manual processes, they may receive the invoice days or weeks after the goods or services have been provided.
With a self-billing agreement, the accounts payable process begins right away. The time saved in processing an invoice results in quicker payments.
Improved supplier-customer relationships
Transitioning to a self-billing agreement can strengthen the relationship between the supplier and the customer. It shows trust and commitment to the efficiency of the engagement.
Additionally, since the customer is creating the invoice, it’s less likely to result in invoicing disputes or hiccups that slow their processes down.
Competitive advantages
Being willing to work through a self-billing agreement helps differentiate you as both a customer and a supplier. In either case, it will help you work with customers or suppliers who actively seek self-billing arrangements.
Best practices for self-billing
Follow these best practices to ensure a smooth and effective transition to self-billing.
Customer selection
Not every customer is a good fit for a self-billing arrangement. A good candidate for self-billing should meet the following criteria:
- Have regular or recurring orders
- Have a well-established history of on-time payments
- Showcase a strong understanding of the invoicing process
- Are willing to commit to a long-term contract or service agreement
- Are VAT registered or are willing to become VAT registered
Agreement design and negotiation
Self-billing agreements must be comprehensive and protect your best interests. Clearly communicating the terms minimizes the risk of handing off your invoicing responsibilities.
The key elements to get right are the scope of the agreement (duration and the goods or services covered), pricing structures, VAT rate application, timing requirements, and dispute resolution.
Integrating with existing systems and processes
You may need to adjust your existing workflows to best incorporate self-billing into your operations.
Consider how self-billing will fit into your current accounting processes and tech stack. To maximize the time savings (and cost savings), look for ways to automate the posting and validation of invoices and the VAT calculations.
Quality control and invoice validation
Every invoice that’s received should be reviewed for accuracy. Every detail, including the individual line items and calculations, must be verified against the existing agreement.
Anybody who’s involved in the process of receiving self-billing invoices should be trained on a process to verify the information presented before entering it into the system.
Communication and relationship management
In the initial months of working with a self-billing customer, you should check in with them and ensure they’re having a smooth experience. If there are any pain points they’re experiencing, work together to try to solve the issue.
Remember that self-billing is supposed to be mutually beneficial. If the customer is having a poor experience, they may consider other suppliers.
Further streamline invoicing with automation
Not every customer will be the right fit for self-billing, but that doesn’t mean they need to be an administrative burden on your workflows.
With invoice automation, you can save time and effort on every invoice sent. From creation to follow-up, the work is minimized, allowing your team to process invoices at scale and maximize their impact.
BILL allows businesses to quickly generate invoices and automate recurring invoices. Plus, customers can pay with flexible methods like ACH payments and credit cards directly from the invoices.
You save time processing invoices and your clients get convenient ways to pay, a win-win situation. Reach out to schedule a demo and see how the platform can streamline your invoicing.
Frequently asked questions
What types of businesses benefit most from self-billing?
Any suppliers that have regular, recurring, and predictable orders from customers can benefit from self-billing. In particular, businesses that operate on monthly retainers, provide raw materials to manufacturers, or have a high volume of low-margin transactions could benefit from the efficiency gains.
How do I approach customers about self-billing arrangements?
The first step for approaching customers is identifying those who could benefit most from a self-billing agreement. Present the idea as mutually beneficial, highlighting how it could serve some of their pain points.
Reassure them that you will continue to provide the same support and assistance throughout the duration of the agreement. Customers may see self-billing as passing off the administrative burden, and it’s important to address those concerns should they arise.
What should I do if a customer makes an error on a self-billing invoice?
As soon as you notice an error on an invoice, you should reach out to the customer. An honest mistake (like a typo) can be quickly fixed with an amended invoice.
However, there should be extra consideration in the case of an incorrect payment or VAT calculation. The self-billing agreement should outline the dispute resolution process in the case of a disagreement on the billed amount.
You’re ultimately responsible for the VAT obligations. The burden falls on you to verify the calculation and amount collected, even if the mistake was made by the customer.
How do I handle pricing changes under a self-billing agreement?
The process for pricing changes should be included in your self-billing agreement. This may be through adjustment clauses, price review schedules, or a termination clause if certain conditions are met.
As an example, a supplier of a specific piece of equipment may have a pricing clause that’s based on the market price of the raw materials used in production. The supplier could add a pricing clause that allows them to adjust the pricing structure if their raw material costs exceed a certain amount.
How do I terminate a self-billing agreement?
Termination clauses should be included in the self-billing agreement. This includes:
- What conditions allow for termination
- Termination notification requirements
- Termination effective dates (i.e. how long after notification will the agreement remain in effect)
- Transition process if moving back to traditional invoicing
