VAT, tax-inclusive prices and invoice numbering: the basics freelancers get wrong

Tax-exclusive means the price you quote is the net amount and the tax is added on top: 100 at 20 % becomes 120. Tax-inclusive means the price already contains the tax and you have to take it back out, which is a division, not a subtraction: 120 ÷ 1.20 = 100 net, and the VAT is 20. Subtracting 20 % from 120 gives 96, which is wrong by four units and, on a year of invoices, by a noticeable amount.

The general formula for the net amount is gross ÷ (1 + rate ÷ 100), and for the tax it is gross − net. At 24 % a gross of 124 gives a net of exactly 100. At 22 % a gross of 100 gives a net of 81.97 and a tax of 18.03 — note that the tax is not 22 % of 100, it is 22 % of 81.97, which is the number that goes on your return.

Which mode to use is a commercial decision, not a tax one. Business clients almost always expect exclusive prices, because they deduct the VAT anyway and want to compare net figures. Consumers expect the price they will actually pay, so inclusive is the honest choice there. Whichever you pick, say so on the invoice — a line reading “Unit prices include tax” removes the ambiguity in five words.

Take three lines of 33.33 at 20 %. Rounding the tax on each line gives 6.67 three times, or 20.01. Rounding once on the total of 99.99 gives 20.00. Both answers are defensible, they differ by a cent, and a client's accounting software will produce one of them and flag your invoice if you produced the other.

The usual convention, and the one most software follows, is to round each line to the currency's precision and then round the tax once per rate, not once per line. That keeps every column adding up visibly, which is what a human checking the sheet wants. HMRC explicitly allows VAT-registered businesses to round the total VAT down to the nearest penny; several continental administrations expect ordinary commercial rounding per rate instead.

An invoice-wide discount makes this worse if you subtract it at the bottom, because the tax base per rate no longer matches the lines above it. The correct treatment is to spread the discount across the lines in proportion to their net amounts, then recompute the tax per rate. InvoiceCanvas does exactly that, which is why a 10 % invoice discount on a mixed-rate invoice still leaves each rate with a base you can point at.

The rule is uniqueness within a sequence, not an unbroken run of integers. Restarting at 001 every January is normal and expected, as long as the year is part of the number so that 2026-001 and 2027-001 are different documents. Zero-padding to a fixed width keeps invoices sorting correctly in a folder and in a spreadsheet, which is a small kindness to your future self.

Gaps are the grey area. Nothing in the directive forbids them, but a tax inspector who sees 014 followed by 016 will ask where 015 went, and “I deleted the draft” is a weaker answer than a cancelled invoice you can show. If you start an invoice and abandon it, the cleanest options are to reuse the number for the next real invoice, or to keep the cancelled one on file marked as cancelled with a zero total.

Once an invoice has been sent and booked, you do not edit it. Article 219 of the directive treats any document that amends an earlier invoice and refers to it specifically as an invoice in its own right — that is a credit note. It carries its own number from your normal sequence, points at the original invoice number, and shows the amounts being reversed, usually as negatives.

If the change is large, the usual practice is to credit the whole invoice and issue a fresh one rather than to credit a single line: two clean documents are easier to reconcile than three partial ones. Either way, send the credit note to the same person who received the original, because their ledger needs both halves of the correction.

Article 230 allows the amounts on an invoice to be in any currency, with one condition: the VAT payable must also be expressed in the currency of the Member State where the tax is due, converted at a published rate — normally the European Central Bank rate or the customs rate for the day the tax became chargeable. The UK has the same requirement in sterling.

Practically, print the conversion on the invoice: the rate, the date it was taken from, and the VAT figure in the local currency. It takes one line, it stops your client's bookkeeper guessing, and it fixes the number so that a later movement in the exchange rate is a foreign-exchange gain or loss in your books rather than an argument about the invoice.