VAT

VAT is collected at every stage of the supply chain. A graphic designer who charges a UK client £1,000 for services may need to add 20% VAT, billing £1,200 total — collecting £200 on behalf of HMRC¹. The designer can then reclaim VAT paid on their own business purchases (software, equipment) against what they collected, and remit only the net difference. This cascade means VAT is ultimately borne by the end consumer and passes through businesses as a collection mechanism. For B2B transactions where both parties are VAT-registered, the reverse charge mechanism often shifts the VAT obligation to the buyer.

US businesses generally don't charge US VAT (it doesn't exist federally), but when selling digital services — software, consulting, design work — to customers in VAT jurisdictions like the EU or UK, VAT rules may apply. The EU's 'place of supply' rules for digital services mean VAT is generally due in the customer's country. For B2B sales, the reverse charge typically applies. For B2C digital sales above the EU-wide threshold, you may need to register for the EU's VAT One Stop Shop (OSS) scheme to comply with multiple countries' requirements. Consult a tax advisor if you're selling services internationally to understand your specific obligations.

If you're VAT-registered, your Invoice must meet specific legal requirements: your VAT registration number, the VAT rate applied, the VAT amount charged as a separate line item, and the net and gross amounts. Clients who are themselves VAT-registered need a valid VAT invoice to reclaim input VAT. An invoice missing the registration number or VAT breakdown may be rejected by their accountant. When creating VAT invoices in an invoice generator, ensure your tool supports VAT-specific fields and stores your registration number for automatic inclusion on all relevant invoices.