Value-added tax (VAT) is a type of consumption tax that’s added to sales in most of the world.
If you run a business, or work as a freelancer or contractor, and you’re registered for consumption tax, you have to add VAT when you create receipts or invoices for your customers.
You’ll also notice that a lot of your suppliers invoice you with this tax.
Do I have to include VAT?
Generally, you have to register for VAT when you earn above a certain threshold. How high that threshold is, will vary from country to country.
But once you’re registered, you have to include VAT on all the receipts and invoices that you give to your clients. What percentage rate you should use, depends on which country you’re operating in, and what you’re selling. The exception is if you’re selling goods or services that are exempt or excepted from consumption tax.
In Australia, Canada, India, Jersey, Malaysia, New Zealand, Samoa, and Singapore, this type of tax is called goods and services tax (GST). The US doesn’t use VAT or GST.
Do I keep the consumption tax?
Once you’re registered, you’ll also have to regularly report how much VAT you’ve paid your suppliers and how much VAT you’ve collected from your clients.
If you’ve paid more than you’ve collected, you’ll get the difference refunded. If you’ve collected more than you’ve claimed, you’ll have to pay the surplus to the tax authorities.
How often you have to report tax, depends on what country you’re operating in, and sometimes also on what industry you’re operating in.
Pro-tip: Manage VAT with invoicing software
With free invoicing software, you can easily include tax on your invoices. Just enter your products and services and choose the right rate. The invoice software will work out the tax for you and clearly display it on your invoice.