Sales tax and VAT on invoices
Indirect tax is where invoicing stops being a formatting exercise. Charge it when you should not have and you owe the client a correction; fail to charge it when you should have and the liability is usually yours, not theirs — you simply discounted your own work by the tax rate without noticing.
Two different systems, often confused
Most of the world runs a value-added tax; the United States does not. They behave differently enough that advice written for one is frequently wrong for the other.
- VAT and GST (UK, EU, Canada, Australia, and much of the world) apply at every stage of the chain. Businesses charge it on sales, reclaim it on purchases, and remit the difference. The tax is designed to fall on the final consumer, with businesses acting as collectors.
- US sales tax applies once, at retail sale to the end user. It is levied by states and often by counties and cities as well, so the applicable rate depends on precise location. Businesses buying for resale typically provide an exemption certificate instead of paying it.
The consequence for a freelancer: under VAT, a business client is largely indifferent to the tax because they reclaim it. Under US sales tax, whether your service is taxable at all varies state by state, and many services are not.
When you have to register
Registration is threshold-driven nearly everywhere, and the thresholds move. What stays constant is the shape of the rule.
| Jurisdiction | Trigger | Notes |
|---|---|---|
| United Kingdom | Taxable turnover above a rolling 12-month threshold | Voluntary registration is possible below it and often worth it if your clients are VAT-registered businesses. |
| European Union | National thresholds, varying widely by member state | Some states have no threshold at all for non-established businesses. |
| United States | Economic or physical nexus in a state | Post-Wayfair, remote sellers can create nexus by sales volume alone, with separate thresholds per state. |
| Canada | Small-supplier threshold for GST/HST | Provincial sales taxes in some provinces are registered separately. |
| Australia | GST turnover threshold | Lower threshold for taxi and ride-sharing services. |
Watch the rolling window. VAT thresholds are typically measured over any rolling twelve months, not a tax year. A strong quarter can push you over mid-year, and the obligation to register starts then — not at the next year-end.
Showing it correctly on the invoice
Once registered, your invoice is not merely a payment request; it is the document your client relies on to reclaim the tax. If it is deficient, they may be unable to, and they will come back to you.
- Show the net, the tax and the gross separately. A single tax-inclusive figure is insufficient in most VAT regimes.
- State the rate applied per line where different rates apply. Mixed-rate invoices are common and frequently wrong.
- Include your tax registration number. Mandatory nearly everywhere once registered, and the most common omission.
- Show the tax point where it differs from the invoice date — it determines which period the tax falls into.
- Label it accurately. “VAT”, “GST”, “Sales tax” and their local rates are not interchangeable words; use the one that applies to you.
Set your tax rate and label once; every invoice calculates from it.
Open the invoice generator →Free, no sign-up, and nothing you type is sent to a server.
Cross-border work
Selling across a border changes who accounts for the tax, and this is where small suppliers most often get it wrong in both directions.
- Reverse charge. On many business-to-business supplies of services between countries, the customer accounts for the tax in their own country rather than you charging it. Your invoice usually shows no tax, carries the customer's registration number, and states that the reverse charge applies. Omitting that statement can invalidate the treatment.
- Business versus consumer. The rules commonly diverge sharply. Selling a digital service to an EU consumer can require charging tax at that consumer's local rate, regardless of where you are.
- Proving your customer is a business. Usually means holding and validating their tax registration number — and keeping evidence that you checked.
- Place of supply is the concept that decides all of this, and it is not always where you are sitting. For most B2B services it follows the customer.
The registration decision below the threshold
If you are under the threshold, registering voluntarily is a genuine trade-off rather than an obvious answer.
- Registering helps when your clients are registered businesses who reclaim the tax anyway. You recover the tax on your own purchases and the charge costs your clients nothing in real terms.
- Registering hurts when you sell to consumers or non-registered businesses, because your prices effectively rise by the tax rate or your margin absorbs it.
- It is never free. Registration means periodic filings, deadlines and penalties for getting them wrong.
Common questions
Do I charge tax to an overseas client?
It depends on the place-of-supply rules and on whether the customer is a business. Many cross-border B2B service supplies shift the obligation to the customer under a reverse charge; consumer sales frequently do not. This is the area most worth confirming rather than assuming.
What if I should have registered earlier?
Register as soon as you realise. Tax authorities generally treat voluntary disclosure far more leniently than a discrepancy they find themselves, and the liability for tax you failed to charge usually falls on you rather than your clients.
Can I charge tax before my registration comes through?
Typically you cannot show it as tax without a number, but you may be able to raise prices by the equivalent amount and reissue proper tax invoices once registered. The exact mechanism is jurisdiction-specific — check before doing it.
Are my expenses taxable when I rebill them?
Often yes. Costs recharged as part of your supply usually take the tax treatment of that supply, even where the original cost carried none. Genuine disbursements paid as the client's agent are treated differently, and that distinction is narrower than most people assume.
What rate applies if I work in several US states?
Whichever applies at the location where the sale is sourced, which depends on the state's sourcing rules and on whether your service is taxable there at all. Many states do not tax professional services; several do. There is no shortcut here beyond checking each state you have nexus in.
General information, not tax advice. Indirect tax is unusually fact-specific, thresholds and rates change frequently, and the cost of getting it wrong falls on you. Confirm your position with an accountant or your tax authority.
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