Sales tax and VAT on supplier invoices: reading and recording the tax line
Before you record the tax on a supplier invoice, find three things: the rate or rates charged, the tax amount for each, and whether the line prices include tax or exclude it. Then record the net amount and the tax separately, using the tax code your software ties to that rate. Whether the tax is recoverable depends on your jurisdiction, so ask your accountant.
General information for bookkeepers, not accounting, tax or legal advice. Rules and software screens differ by country and change over time.
Whether supplier tax can be reclaimed, and how it must be reported, differs by country, state and business type. Ask your accountant. Nothing here is tax advice.
Two families of tax
Sales tax, as in most US states, is usually charged once, at the sale to the end user. For most purchases a business makes for its own use it is not reclaimed, so it is typically treated as part of what the item cost. VAT, GST and similar taxes, as in the UK, EU, Canada, Australia and New Zealand, are charged at each step, and a registered business can often reclaim what it pays as input tax.
That difference changes how the same printed tax line is recorded. Exemptions, reduced rates and reverse charges exist in both families, and the rules change. Treat what follows as the mechanics of reading and recording the line, not as advice on what you may claim.
Reading the tax on an invoice
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Find the rate and the amount
Look for the rate, the taxable amount it applies to and the tax charged. Several rates mean several tax lines.
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Note whether prices include tax
Some invoices say so outright. If the subtotal plus the tax line equals the total, the prices are exclusive. If the lines alone add up to the total, they are inclusive.
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Check the supplier details
Where tax can be reclaimed, the supplier's tax registration number and an invoice number usually matter. Check that they are printed.
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Choose the tax code
Map each printed rate to the tax code in QuickBooks Online or the tax type in Xero that your books use for that rate on purchases.
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Record net and tax
Enter the net line amounts and let the software calculate the tax, or enter the tax amount from the invoice.
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Compare with the paper
The tax and the gross total in your books must match the invoice. A cent or two of rounding is normal. More is an error.
Tax exclusive versus tax inclusive
| Point | Tax exclusive | Tax inclusive |
|---|---|---|
| What the invoice shows | Net prices, then tax added, then the total. | Gross prices that already contain the tax. |
| Example at 10% | Net 200.00 + tax 20.00 = total 220.00. | Gross 220.00 contains tax 20.00 and net 200.00. |
| Working backwards | Tax = net × rate. | Net = gross ÷ (1 + rate). Tax = gross − net. |
| Typical mistake | Gross keyed as net, so tax is charged again. | Net keyed as gross, so tax comes out too low. |
| Check | Net + tax equals the printed total. | Gross equals the printed total, and tax matches the printed tax line. |
Details that trip people up
- Rounding. Tax worked out per line and tax worked out on the invoice can differ by a cent or two. Intuit's help says that in the QuickBooks Online bill import a tax amount you enter overrides QuickBooks' own calculation. Check how your version of Xero handles a printed tax amount.
- Mixed rates. One invoice can hold standard, reduced and zero-rated lines. Record each line with its own code.
- Zero-rated, exempt and out of scope are different things in many VAT and GST systems, even though all show no tax. Ask your accountant which applies.
- Reverse charge and use tax. Some invoices carry no tax because the buyer accounts for it. The code you choose tells your software to do that.
- Foreign suppliers. Tax shown in another currency may need converting. See multi-currency supplier bills.
What goes wrong
Tax charged on tax
Tax-inclusive prices keyed as exclusive. The bill comes out higher than the invoice by the tax.
Right amount, wrong code
The bill ties, but the purchase carries a sales rate or an exempt rate, so reports and returns are wrong.
Non-recoverable tax treated as recoverable
Tax posted to a recoverable account for a purchase that does not qualify. Ask your accountant which applies.
A missing registration number
Where an invoice must show it, a document without it may not support a claim. Ask the supplier for a corrected invoice.
How BillToCSV helps
BillToCSV reads the printed tax lines and rates from a supplier invoice and checks that subtotal plus tax and other charges equals the total. It can spread the tax across the lines to the cent or write it as its own line, and it writes the line tax amount to the file. It leaves tax codes and Xero tax types for you, because only you know your tax setup, and it does not decide whether tax is recoverable. Try the converter. Free: 1 file per day, up to 10 pages, no account. See pricing.
Questions people ask
What is the difference between sales tax and VAT on an invoice?
Sales tax is usually charged once, at the sale to the end user. VAT and GST are charged at each step, and registered businesses can often reclaim what they pay. The printed line looks similar, but how you record it differs by jurisdiction.
How do I tell whether an invoice is tax inclusive?
Look for wording such as prices include tax, or a tax line that sits inside the total. If the subtotal plus the printed tax equals the total, the prices are exclusive. If the lines alone add up to the total, they are inclusive.
How do I work out tax from a tax-inclusive price?
Divide the gross amount by one plus the rate to get the net, then subtract to get the tax. At 10%, 220.00 gives net 200.00 and tax 20.00. Take the rate from the invoice, not from an example.
Why is my tax a cent different from the invoice?
Rounding. Software may calculate tax per line while the supplier calculated it on the total, or the other way round. Enter the printed tax amount if your software allows it to override its own calculation.
Can I reclaim the tax on a supplier invoice?
That depends on your country, your registration and the purchase, and this guide cannot answer it. Ask your accountant, and keep the invoice with the supplier's tax details intact.
What if an invoice shows no tax at all?
It may be zero-rated, exempt, out of scope, or subject to reverse charge or use tax. Record it with the code your accountant assigns to that situation, and do not invent a tax line.