Most freelancers meet consumption tax the first time a client asks "does that include VAT?" or an accountant asks whether they have registered. The rules are national, detailed and changeable, and this guide does not attempt to state them. What it does is explain the vocabulary and the mechanics so that the conversation with your accountant is short, and so that when you know your treatment you can put it on the invoice correctly.
Nothing here is tax advice, and no rates appear on purpose — they differ by country, by region and by product, and they change. Use the official sources at the end for your jurisdiction. In Simple Invoice the arithmetic is handled for you once you enter the taxes that apply to you.
Three systems, one idea
VAT (value added tax), GST (goods and services tax) and sales tax are all taxes on consumption collected by the seller and passed on to the government. They differ in mechanics.
- VAT — used across Europe and much of the world. Charged at every stage of a supply chain; registered businesses charge it on sales and reclaim what they paid on purchases, so the invoice must show the tax separately for the buyer to reclaim it.
- GST — the same mechanism under a different name in countries such as Australia, Canada, New Zealand, Singapore and India, sometimes combined with regional taxes.
- Sales tax — used in the United States, set by states and often by cities and counties. Charged once, to the final consumer, at the rate of the place the sale is deemed to occur; business buyers may be exempt with a certificate.
Registration: do you charge tax at all?
You only charge tax if you are registered (or required to be) for it. Most VAT and GST systems set a turnover threshold below which registration is optional and above which it is mandatory, and some let you register voluntarily to reclaim tax on your own purchases. Sales tax obligations in the US depend on where you have a presence or enough sales — the concept called nexus — which for remote sellers can arise in states you have never visited.
If you are not registered, your invoices carry no tax line. Some countries expect a short note explaining why tax is not charged; your accountant will know the wording. If you are registered, your registration number goes on every invoice and the tax must be shown as the rules require.
What a tax invoice typically shows
Beyond the ordinary elements of an invoice, tax systems commonly require some or all of the following. What to include on an invoice covers the base document.
- Your tax registration number, and in many business-to-business cases the client's too
- The date of supply or tax point, where it differs from the issue date
- For each line or group of lines: the amount before tax, the rate applied and the tax amount
- A total of tax charged, and the total including tax
- For zero-rated or exempt supplies, a statement to that effect
- For cross-border business supplies where the customer accounts for the tax, a reverse-charge statement
- In some countries, the word "Tax invoice" as the title
Taxable, exempt and zero-rated lines
Not every line on an invoice is treated the same. A taxable line has tax added at some rate. A zero-rated line is taxable at a rate of nothing — still within the system, still reported, still lets the seller reclaim input tax. An exempt line is outside the tax entirely. An invoice can mix these, which is why per-line tax flags exist: for example, a service line taxed normally and a disbursement passed on at cost with no tax.
In Simple Invoice each line item has a taxable toggle. Taxes are applied to the taxable lines only, and the totals block shows each tax with its label and rate on its own row.
How tax is calculated on an invoice
The arithmetic is simpler than the rules. Each line's amount is quantity times rate, minus any line discount. The subtotal is the sum of the lines. An invoice-level discount, if any, is deducted next. Each tax is then applied to the taxable share of that post-discount amount and rounded to the currency's decimals; when several taxes apply — a national and a regional tax, say — each is calculated independently on the same base rather than one on top of the other. The total is the post-discount amount plus all taxes.
Rounding conventions differ slightly between authorities (per line or per invoice, half up or half even). For most small invoices the difference is at most a cent; if your authority mandates a method, check that your tool's totals match its guidance. Simple Invoice rounds each line and each tax amount half away from zero to the currency's decimals and calculates taxes on the invoice total base.
Cross-border sales
Selling to a client in another country changes where the tax is due and who accounts for it. Business-to-business services are frequently taxed where the customer is, with the customer accounting for the tax and the invoice carrying a reverse-charge statement and both registration numbers. Consumers, goods and digital services each have their own rules, and some require the seller to register in the customer's country. How to invoice international clients sets out the questions to ask.
Records
Registered businesses must keep the invoices they issue and receive for a period set by law and report the tax collected on a schedule. Keep every issued invoice as a PDF, filed by period; in Simple Invoice you can also download the current document as JSON from the Export menu.
Setting up taxes in Simple Invoice
Once your accountant has told you which taxes apply, add each one to the current invoice with a label ("VAT", "GST", "State sales tax") and its rate; mark any non-taxable line with the toggle. The totals block can show the tax breakdown per tax, and every label — including the tax line labels — is editable in the sidebar's Labels section. Put any required statement, such as a reverse-charge or exemption note, in the Terms or a Text block.
Questions
I am not registered. Do I mention tax on my invoices at all?
You do not charge it. Some countries expect a brief note stating that tax is not charged and the reason (for example, that you are below the registration threshold). Ask your accountant for the wording that applies to you.
Can an invoice have more than one tax?
Yes — for example a national and a regional tax. Simple Invoice applies each tax independently to the taxable base and shows them on separate rows in the totals block.
Why does this guide not list any rates?
Rates vary by country, region and product category and change over time. Listing them here would make the guide wrong somewhere within months. Use the official sources for your jurisdiction, or ask an adviser.