Self-Billing Invoices for Contractors: How They Work in the UK
How self-billing works for UK recruitment agencies paying Ltd contractors: the HMRC agreement you need, what each invoice must show, and common mistakes.
If you place limited company contractors, there’s a good chance you don’t wait for their invoices at all. You take the approved timesheet, raise the invoice yourself, send the contractor a copy with the payment, and move on. That’s self-billing, and on a lot of contract desks it’s just how things are done.
I’ve spent seven years in recruitment software, and self-billing is one of those things that works quietly in the background right up until somebody asks for the paperwork behind it. It isn’t complicated. But it does come with a handful of HMRC rules, and if you break them, the invoices you’ve raised stop being proper VAT invoices. So here’s how it works, what you need in place, and where it tends to go wrong.
What self-billing actually is
Normally, a supplier invoices their customer. With self-billing, it’s the other way round: the customer prepares the supplier’s invoice and sends them a copy with the payment (HMRC, VAT Notice 700/62).
On a contract desk, the agency is the customer and the contractor’s limited company is the supplier. You already know the hours from the timesheet and the rate from the placement, so it makes sense for you to produce the invoice rather than wait for each contractor to send one in their own format, with their own rounding and their own idea of which week it covers.
The benefits for the agency are pretty obvious:
- One format. Every contractor invoice looks the same, because you made it.
- No chasing. You’re not waiting on 40 contractors to send invoices before you can pay them.
- Fewer disputes. The invoice comes from the approved timesheet, so the hours and the rate match what the client is being billed.
You don’t need HMRC’s permission to self-bill. You do need a few things in place first.
The self-billing agreement
You can only issue self-billed invoices to a supplier you have a self-billing agreement with, and it has to be in place before you start (VAT Notice 700/62, section 3). HMRC says a valid agreement must:
- include the supplier’s agreement to you raising invoices for their supplies
- say the supplier won’t raise their own VAT invoices for the supplies it covers
- say the supplier will accept each self-billed invoice you create
- have a start date and an expiry date, though the expiry can be tied to the end of the contract
- be in writing, on paper or electronically, so it binds both of you
- include the supplier’s agreement to tell you if they deregister for VAT, transfer the business as a going concern or get a new VAT number
- say if you’re outsourcing the invoicing to a third party, such as a bureau
You can write your own, use HMRC’s example agreement from section 8 of the notice, or put the wording into your contractor terms. That last option is the one I’d go for. If the self-billing clause is part of the contract, the agreement lasts as long as the contract does, and you’re not tracking a separate document with its own expiry date.
If you do use standalone agreements, HMRC advises reviewing them every 12 months. Put the expiry date somewhere it’ll actually get noticed. You must not self-bill anyone when you don’t have their agreement in place, and “it ran out in March and nobody spotted it” isn’t a great position to be in.
What every self-billed invoice must show
A self-billed invoice has to contain everything a normal full VAT invoice does (see VAT Notice 700, paragraph 16.3), including the supplier’s name, address and VAT registration number. On top of that:
- It must be clearly marked “SELF-BILLING”. That part has the force of law.
- HMRC advises adding the line “The VAT shown is your output tax due to HMRC”, so the contractor doesn’t mistake it for a purchase invoice and try to claim the VAT back.
It also needs the tax point, and this one catches people out. The tax point is the date a supply is treated as having happened for VAT, and it decides which VAT return the VAT goes on. For services like a contractor’s, the basic tax point is normally the date the work is done, apart from invoicing (VAT Notice 700, section 14). Issuing a self-billed invoice doesn’t normally create a tax point the way a supplier’s own invoice would. The exception is a self-bill issued within 14 days of the basic tax point. So it’s worth knowing which rule your invoices fall under, because it decides which VAT period the contractor accounts for the output tax in and when you can claim the input tax.
The rules that trip agencies up
Most self-billing problems aren’t about the invoice itself. They’re about the data behind it going stale. A few that are worth watching for:
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Self-billing a contractor who isn’t VAT registered. You must not issue self-billed VAT invoices on behalf of suppliers who aren’t registered or have cancelled their registration. If a contractor’s company deregisters and nobody updates the placement, you’ll keep adding VAT that shouldn’t be there, and you can’t reclaim it. HMRC’s check a VAT number service makes it easy to check.
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A new VAT number without a new agreement. If a contractor’s company changes VAT number, or the business transfers as a going concern, you need a new agreement before you self-bill them again.
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Both of you raising invoices. Once a contractor has agreed to self-billing, they must not raise their own sales invoices for the same work. If they do, and both end up in your accounts, you’ve got a duplicate. You can’t claim input tax on a supplier’s invoice for something you’ve already self-billed.
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Fixing mistakes by netting them off. If you’ve overpaid on a self-billed invoice, HMRC says you shouldn’t just knock it off the next invoice. Issue a debit note for the change instead, so each invoice still matches the supply it’s for. In recruitment, where rates get backdated and timesheets get corrected after payroll, this comes up more than you’d think.
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Not knowing who you self-bill. You have to keep the names, addresses and VAT numbers of every supplier you self-bill, and be able to show HMRC if they ask. HMRC suggests keeping a list. If that list is “whoever’s in the payment run this week”, it isn’t really a list.
If you break the rules, your self-billed invoices aren’t proper invoices. They’re not evidence of your right to claim the input tax, and the contractor has to issue their own. That’s a lot of tidying up for something that should have been routine.
A worked example (illustrative)
These figures are made up to show what goes on a self-billed invoice. They aren’t advice.
Say a Ltd contractor, outside IR35 and VAT registered, works five days at £400 a day, and the client is charged £480 a day:
| Illustrative week | Amount |
|---|---|
| Timesheet | 5 days, approved by the client |
| Self-billed invoice to the contractor’s company (5 × £400) | £2,000.00 |
| VAT at 20% (the contractor’s output tax) | £400.00 |
| Total paid to the contractor’s company | £2,400.00 |
| Sales invoice to the client (5 × £480), before VAT | £2,400.00 |
| Margin | £400.00 (16.7%) |
The self-billed invoice is marked “SELF-BILLING”, shows the contractor’s company name, address and VAT number, has the tax point, and includes “The VAT shown is your output tax due to HMRC”. The contractor keeps the copy you send them and accounts for the £400 VAT as their output tax.
Now say the contractor’s company deregistered for VAT a month ago and told the recruiter, but the placement was never updated. You’d still be adding £400 of VAT that shouldn’t be on the invoice. The fix is easy. Spotting it is the hard part.
If the role is inside IR35, the agency is usually the fee payer, and the payment to the contractor’s company has tax and NI deducted before it goes out. I’ve covered how that works in IR35 for recruitment agencies. And if you’re working out what the margin on a placement really is, there’s more on that in how to calculate margin on a contract placement.
What about umbrella and PAYE contractors?
Self-billing is really about suppliers who’d otherwise invoice you. PAYE contractors are on your payroll, so they get payslips, not invoices. Umbrella companies do invoice you, and some agencies self-bill umbrellas too, in which case the same rules apply: an agreement, the “SELF-BILLING” marking and a valid VAT number. I went through how the three types differ in PAYE vs umbrella vs limited company contractors.
What to record for every self-billed contractor
The rules are simple enough. The hard part is keeping the data behind them up to date across every live placement. For each contractor you self-bill, it’s worth having:
- The agreement. Where it lives, when it started, when it ends, or which contract it’s tied to.
- VAT status and number. And when it was last checked.
- The company details. Name and address as they need to appear on the invoice.
- Changes over time. Deregistrations, new VAT numbers, transfers and company name changes, with the date each takes effect.
If that’s split between a spreadsheet, a shared inbox and someone’s memory, it’ll be right most of the time. Most of the time isn’t great when the cost of getting it wrong is a VAT assessment. I’ve written before about how small pay and bill errors compound, and stale supplier details are a classic one.
Where Paid & Billed fits in
I’m building Paid & Billed for small UK contract desks, and self-billing is at the heart of how contractor pay works there. The idea is that approved timesheets drive the self-billed invoice and the client invoice from the same data, and each placement holds the details those invoices depend on. A few of the things in this post are on the plan: checking a contractor’s VAT number with HMRC before VAT goes on an invoice and flagging when it changes, keeping track of when each self-billing agreement starts and ends with a reminder before it runs out, and putting the “SELF-BILLING” wording and tax point on every invoice without anyone having to remember.
It’s still in development, so I’m not going to pretend it does any of that today. But if you self-bill contractors every week and have opinions on where it goes wrong, I’d love to hear them. Join the waitlist to follow along and help shape what gets built.
