Net, gross, and tax: what they mean on an invoice

The three numbers

Every invoice that includes tax has three amounts, always in the same relationship:

• Net — the price of your work before any tax is added. This is what you are actually charging for the work itself.
• Tax — the amount of VAT calculated on top of the net amount.
• Gross — the total the client pays. Net + tax = gross.

Example: you charge £1,000 for a project at 20% VAT. The invoice shows net £1,000, VAT £200, gross £1,200. Your client pays £1,200. You keep £1,000. The £200 belongs to the tax authority.

What the tax is called depends on your country

The arithmetic is identical everywhere. Only the name changes:

• VAT (Value Added Tax) — UK and most of Europe. Standard UK rate: 20%. EU rates vary by country, typically 19–25%.
• GST (Goods and Services Tax) — Australia (10%), New Zealand (15%), Canada (5% federal GST, plus provincial), Singapore (9%).
• HST (Harmonised Sales Tax) — some Canadian provinces combine GST and provincial sales tax into a single rate (13% in Ontario, 15% in Nova Scotia).
• Sales tax — United States. No federal rate. Each state sets its own, ranging from 0% to over 10%. Unlike VAT and GST, US sales tax is typically only added at the final sale — not at every stage of the supply chain.

Tax-exclusive vs tax-inclusive pricing

How you quote a price determines whether tax is on top or already included:

• Tax-exclusive (ex-tax) — you quote the net price. Tax is added on top when you invoice. Most common in B2B. “£1,000 + VAT” means the client pays £1,200.
• Tax-inclusive (inc-tax) — you quote the gross price and the tax is already inside it. More common in retail. “£1,200 inc. VAT” means the tax component is £200, your net is £1,000.

In B2B work, quote ex-tax. Most business clients are registered for VAT themselves and reclaim the tax — the net figure is what they are actually comparing. Quoting gross makes your prices look higher and creates confusion.

Doing the maths both ways

You will regularly need to go in both directions:

Adding VAT to a net amount (tax-exclusive):

• Tax amount = net × tax rate
• Gross = net + tax
• Example: £800 net × 20% = £160 VAT. Gross = £960.

Removing VAT from a gross amount (tax-inclusive):

• Net = gross ÷ (1 + tax rate)
• Tax = gross − net
• Example: £960 gross ÷ 1.20 = £800 net. Tax = £160.

Dividing by 1.20 (for 20% VAT) is not the same as multiplying by 80%. The division is correct; the multiplication will give you a slightly wrong answer and add up over time.

When you do not add tax

Not every invoice includes tax. You only charge VAT if:

• You are registered for that tax (there is usually a registration threshold based on annual turnover)
• The supply is taxable (some goods and services are exempt or zero-rated)
• The transaction is within scope for that tax system

If you are not registered, your invoice shows the net amount only. Do not add a tax line, and do not charge a tax rate you are not registered for — that is illegal in most jurisdictions.

What goes on the invoice

A tax-registered invoice must typically show all three figures clearly:

• The net amount (or amounts per line item)
• The tax rate applied
• The tax amount
• The gross total

The exact requirements vary by country and registration type. The regional tax guides in the Learn section cover what your country specifically requires.