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I understand that when a limited company makes business expenses, it should keep track of invoices that their suppliers issue them, as well as receipts showing that the company has paid these invoices.

If a company has the receipt showing that it has paid for a good or service, why does it also need to keep the invoice? If a company has receipts but no invoices for some of its expenses, can this cause problems at tax time (and if so, what problems)?

For context: My limited company is in the UK - where I live and work - but I'm also an American citizen, which makes it a 'controlled foreign corporation' from the perspective of the US. So the tax laws of both countries are relevant - I'd welcome answers from either a UK or US perspective.

Gabriel
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3 Answers3

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Invoices often provide more information than a receipt about the product or service purchased, including the amount of tax paid. The information on a receipt may not be enough to substantiate a deduction or tax credit claimed by the business.

This is particularly important in countries like the United Kingdom with a value-added tax. Suppliers who are registered for VAT must issue VAT invoices which describe the goods or services, and specify the applicable rate and total amount of VAT charged. Purchasers who are registered for VAT are entitled to claim back the VAT charged by the supplier as input tax, but must retain a VAT invoice as evidence that the expense included VAT.

sjy
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Consider this from the point of view of an accountant. When accounting for a firm's financial transactions, accountants record revenue and expenses through accrual accounting, as opposed to recording cash receipts and payments via cash accounting.

For example, if you purchase A for $X on Jan 1, you receive an invoice for $X and the firm notes that it has generated $X of revenue. More importantly, the firm can provide you with some credit or terms of payment that allow you to pay up later, but this $X is recorded as revenue upon sale. Eventually, you'll have to actually pay them $X and you'll receive a receipt after doing so, but most firms trust that you'll pay up eventually because of the going concern assumption; firms assume that you're financially stable enough to pay your dues when they are due.

This line of credit is why receipts and invoices are separate documents and both should be kept. An invoice without a matching receipt means that somewhere out there, someone owes you money for something that has been purchased and not paid for.

Conversely, a receipt without a matching invoice means that someone has given you money but you don't know what you've given them. This generally means that something has gone wrong internally (the exact phrasing used by accountants is internal controls). For example, the company might have lost track of some inventory or screwed up its cash receipts. This might be a minor mistake, but internal controls are also paramount in ensuring that people aren't embezzling from the firm or stealing money from customers.

If a firm is legally required to produce audited financial statements, the firm's internal controls will be examined by an auditor. This includes tallying up receipts, calculating the amount of money owed by customers (i.e., the accounts receivable) and how long it takes to receive money on average, matching inventory records to physical inventory, and so on. I've worked with auditors, and while we don't require every single receipt to be present, we do expect most of the paperwork to be filed and kept on hand.

dragmehomenow
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The other answers are correct as to reasons to track invoices and receipts separately. But it is true that there are cases where this is probably unnecessary.

A common example is online purchases, where all of the following often apply:

  1. Payment is transferred immediately from credit card.
  2. The receipt includes all the same information as the invoice.

And thus the answer to the question is: both must be kept if the information differs, or if the receipt is not immediately available.

jpa
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