Issuing a private invoice: What you need to consider
Even as a private individual, creating an invoice is no problem. If you were to sell your car, or charge for a non-professional service, the person making a purchase from you may require a personal invoice. Many companies also require invoices when purchasing a product or service from a private individual. It’s easy to wonder why an individual would bother issuing an invoice, or even if they are permitted to do so.
The tax authorities are only interested in invoices from business owners. In certain cases, for example, a business owner (company, sole trader) must issue an invoice for goods or services to another trader or legal entity. For a private individual, issuing invoices can have tax consequences – for example, if the tax authorities decide to categorize your transactions as commercial rather than private. This often happens when a private individual sells items or performs services fairly regularly.
Additionally, in principle profits from private transactions are subject to taxation. However, if you resell a used item, like a vehicle or cell phone, you can issue a private invoice without worrying about any consequences. Since the sale price of the item is likely to be less than the original purchase price, a taxable profit was not incurred.
When should you, as a private person, write an invoice?
If you are doing work as a private individual, you can issue a private invoice for it. The value of the goods or services being provided is not important. The invoice can also be addressed to another individual, as well as to a company. Even a private person may demand an invoice from another private individual when conducting financial transactions.
No rules for private invoices
An invoice issued by a private individual, i.e. not in the context of a trade or professional activity, does not generally have to comply with regulations. As a private individual, you do not need to contact the tax authorities in advance in order to be able to issue a private invoice. Unlike invoices from companies, invoices from private individuals are not bound by formal requirements and may vary as much as you like.
However, from a legal perspective, each invoice is a request for payment, i.e. it is a claim for the issuer to the recipient. Although there are no formal requirements for this in private transport, a private invoice should contain certain elements in order to justify the claim being presented. Therefore, a private invoice should include the following points:
- Name and address of the issuer
- Name and address of the recipient
- Location and invoice issue date
- Reason for invoicing: Sale of goods, services rendered or similar
- Performances (or services) in list form, if applicable, including:
- Time of delivery
- Number, type, unit price, total price (possibly per item)
- Invoice amount, if applicable as the sum of the individual items
A greeting to the recipient, and possibly also a thank you will round off the invoice nicely.
If the invoice is not immediately paid in cash (in this instance, the received amount can also be acknowledged directly on the invoice), the invoice should also include the issuer’s bank details, including their IBAN number. In any case, you should also specify a payment date on a private invoice – either “immediately”, a deadline (“in ten days after receipt of invoice”) or a specific date. This information is important, because if the debtor exceeds the specified payment deadline, i.e. does not pay the amount in due time, then, as is legally stated, they will be in default of payment. It therefore violates the invoice contract (e.g. sales contract) and the invoice issuer can order payment, and take further action if necessary. In general, the defaulting debtor must also compensate for damages caused by late payment if they are responsible for it.
Added to that, it should be noted that the 14-day right of withdrawal applicable to company contracts does not apply to private legal transactions. With a corresponding note on the private account, you can remind the recipient once again in order to avoid unnecessary uncertainties or even disputes:
“This invoice concerns a private transaction, so the 14-day withdrawal period applicable to consumer contracts shall not apply.”
Other details of the legal transaction can also be included on the private invoice. If, for example, a used item being sold has a known defect, it is worth noting that on the private invoice.
“As previously discussed, the phone’s display screen has small scratches on the top left.”
What should not be included on a private invoice?
Of course, charging sales tax is not necessary in a private transaction, and should not appear on the invoice. Only companies are liable for sales tax and anyone issuing a private invoice is expressly not acting as a business.
It cannot hurt to make a clear reference to the fact that a private invoice is precisely that. This will avoid further questions, about sales tax or other items required for business invoices (e.g. company name or commercial register entry).
Whether you’re using a text program or a special invoice program, writing a private invoice can be done easily in just a few steps. When you create the invoice, make sure that you do not forget any items you want the document to contain. Any additional notes you may want to describe the invoice’s subject matter should be placed at the end of the invoice. Be sure to make a copy of the invoice yourself, either on paper or electronically. If necessary, you can use this copy later for your annual tax returns.
Private sales limitations: When do you become an entrepreneur?
Anyone issuing private invoices more than just a couple of time should be aware of the following: As soon as an economic activity takes place regularly, the tax office can deduce that you are exercising a trade or profession. This will mean that you have to register as a trader or at least as a freelancer with the tax office. Depending on what goods are being sold, a sale per quarter can be considered “regular” by the tax office. The line from private provider to entrepreneur can be quickly, and often unintentionally crossed.
There are no clear rules on when a sale should be considered private and when it should be considered commercial. There are only a few features to look out for as a private seller. When it comes to the sale of goods, the following criteria are considered to be indications of commercial activity:
- The purchase of goods for resale
- Sale of new products or many similar items
- Regular sales over a longer period of time
- Many sales during a brief period, e.g. 30 items per month
- Sales on behalf of a third party like parents or friends
- Having a professional website with advertising
If you meet any of these criteria, you should consider registering as a trader before the tax office finds out. After all, they will allow you to occasionally sell goods like clothing, televisions, cell phones, jewelry, furniture and perhaps a games console over the Internet without having to register a business or pay taxes. As a commercial dealer, you have more extensive obligations and, for example, you have to guarantee private buyers a 14-day right of withdrawal and a warranty in case the item is defective.
Be careful if you frequently sell items on eBay. This can be regarded as regular activity by the tax office. You could then be considered a sole trader, with all the associated commercial and tax obligations.
However, you can still be liable for income tax even on private sales if you buy an item and resell it for a profit. Check with local state authorities to see what the free limits are where you live. Additionally, you only have to tax these profits within a speculative period between purchase and sale of one year. However, for privately purchased and resold properties, the speculative period is longer if the property is not used privately.
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