Invoicing is an essential part of doing business, so it’s very important that every tiny detail is recorded correctly. Even with the best of intentions, however, it’s easy for mistakes to be made while invoicing. And even if you don’t make any slip-ups, you might still need to cancel the invoice if the customer requests a change.
But can you cancel an invoice once it’s been issued? The process isn’t quite as easy as you might think. Invoices can be cancelled, but you’ll need to issue another invoice to do so. As an invoice is a formal document which can be audited by HMRC, you can’t simply rip one up. We’ll explore this question more in depth below. If a customer invoice goes unpaid, should you cancel it or can you write it off?
What is an Invoice?
If you’re new to accounting or running a business, you might be a little hazy on exactly what constitutes an invoice. Put simply, it’s a document which a company sends to its clients that lists the services and products provided, and the amount of money owed.
An invoice is usually issued before payment is made. This ensures that the correct amount of money is paid, and that both parties are clear about what is covered by the payment. An invoice also forms an integral part of record-keeping for the business and can be used for the purposes of an audit.
What Must Be Included on an Invoice?
Although the concept is simple, by law there’s certain information that must be included for the invoice to be valid. The requirements may vary slightly depending on whether you’re a sole trader, a limited company, or VAT-registered, but in general you’ll need to include:
• The total sum owed
• The amount being charged (this may be different to what’s owed)
• A unique identifying number
• The name of your company and its address plus contact details
• Your customer’s name and address
• The date the services/products were provided
• A date on the invoice
• A description of what was provided
• VAT if applicable
Who Can Cancel Invoices?
If you come to an agreement with a customer that an invoice should be cancelled, it might seem easier for the customer to simply cross through it. In the eyes of the law this isn’t sufficient, however, because an invoice recipient does not have the right to cancel any invoices or make changes.
Only the person who issued the invoice has the right to cancel it. This means if it no longer applies, you’ll need to issue another invoice before it can be considered as cancelled. Yes — this does mean more work for you, but for everything to be legitimate, there’s no alternative.
Cancelling an Invoice: the Detailed Process
To cancel an invoice, you don’t have to do anything to the original one. Instead, you’ll need to create a second invoice which cancels out the first one, leaving the customer with no action to take.
The second invoice acts as a credit note, reversing the payment requested. The amounts should be identical, but on the second invoice you issue a credit which will be shown as a negative sum. This counteracts the amount on the first invoice, effectively cancelling it.
Even though the new invoice is only being issued to cancel the prior one, you still need to follow the correct process. This means issuing it with a new invoice number and including all the statutory information.
To make it easier for your accountant or HMRC to connect the two invoices, you could add a reference on the new invoice. If you’re keeping paper copies as well as digital files, clipping the two invoices together will also help.