VAT (Value-Added Tax)
VAT, or value-added tax, is a consumption tax added to the price of goods and services at each stage of production and sale.
VAT, short for value-added tax, is a tax on consumption used in many countries around the world. It's added to the price of most goods and services, collected by businesses at each step, and ultimately paid by the final customer. If you sell into VAT regions, you'll likely need to show it on your invoices and pass it on to the tax authority.
What it means
VAT is charged as a percentage of the sale price at every stage where value is added, from supplier to manufacturer to retailer. Each business charges VAT on what it sells (output tax) and reclaims the VAT it paid on purchases (input tax), sending the difference to the government.
The end consumer can't reclaim it, so they bear the final cost. VAT differs from US-style sales tax, which is charged only once at the final point of sale rather than at each stage.
VAT on invoices
When VAT applies, it needs to appear clearly on the invoice.
- Show the net amount before tax
- Show the VAT rate applied and the VAT amount
- Show the gross total the customer actually pays
- Include your VAT registration number where required
Example
A designer in a VAT country invoices $1,000 of work at a 20% VAT rate. The invoice shows $1,000 net, $200 VAT, and a $1,200 total. The designer later pays that $200 (less any VAT they paid on business costs) to the tax authority.
In Platybooks you can set a default tax rate in your settings so new invoice lines apply it automatically, and the PDF shows the tax broken out clearly.
Frequently asked questions
What is the difference between VAT and sales tax?
VAT is collected in stages throughout the supply chain, with businesses reclaiming the VAT they pay on inputs, while US sales tax is charged only once at the final retail sale. Both end up paid by the final consumer.
Do I have to charge VAT?
It depends on your country, whether you're VAT-registered, and what you sell. Many places require registration only above a sales threshold. Check your local tax authority's rules, as they vary widely by region.
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