This article explains how VAT is calculated when you create Finom invoices.
But first, here’s some general information about VAT that every entrepreneur in Europe must know to effectively comply with local regulations and use our invoicing system to make this process easier.
What is VAT?
The Basics
VAT Rates: VAT rates vary across countries but typically range between 17% and 27%. Some products and services may be subject to reduced or zero rates.
VAT Registration: Once your business revenue exceeds a certain threshold (which differs by country), you must register for VAT. This means you’ll charge VAT on your sales and submit VAT returns to your government.
VAT Invoices: When you sell goods or services, you must issue a VAT invoice to your customers, detailing the VAT rate, net amount (before VAT), and gross amount (after VAT).
Legal Compliance: Key Considerations
Charge VAT Correctly: Always apply the correct VAT rate to your sales.
Issue Proper Invoices: Ensure your invoices include all necessary information, such as your VAT registration number and accurate breakdowns of net, VAT, and gross amounts.
File VAT Returns on Time: Include all the VAT you’ve collected and any VAT you can reclaim on your business expenses.
How to use our Invoicing Feature to Manage VAT
Our invoicing feature is designed to make managing VAT straightforward, whether you’re dealing with domestic sales or transactions across European borders. Here’s how you can use it to comply with VAT regulations and streamline your invoicing process.
Setting Up Your Invoice with VAT
When creating an invoice, you can choose to input prices as either Gross (including VAT) or Net (excluding VAT).
Here are some scenarios to help you:
Scenario 1: VAT-Exclusive Pricing (Net)
When to Use: You agree with your customer on a price before VAT. VAT is added on top of the agreed price.
Example: You sell a product for €100 (Net) with a VAT rate of 20%. The system will calculate the total amount as €100 (Net) + €20 (VAT) = €120 (Gross).
Scenario 2: VAT-Inclusive Pricing (Gross)
When to Use: You agree on a price that already includes VAT, common when selling to consumers who care about the final price.
Example: You sell a product for €120 (Gross) with a VAT rate of 20%. The system will calculate the net amount and VAT: €120 / 1.20 = €100 (Net) + €20 (VAT).
Switching Between Gross and Net Prices
Our invoicing tool allows you to switch between VAT-inclusive and VAT-exclusive pricing easily:
Gross → Net: The input price remains the same but is now treated as the net price. The system recalculates the gross price by adding VAT.
Net → Gross: The input price remains the same but is now treated as the gross price. The system recalculates the net price by subtracting VAT.
Practical Examples: How to Calculate VAT with Our Invoicing System
Example 1: Creating an Invoice with VAT-Inclusive Prices
Scenario: You want to create an invoice for 5 items priced at €10 each, including VAT.
Set Price Type to “Gross”:
Use the price switcher to choose “Gross”.
Enter Item Details:
Quantity: 5
Price: €10 (Gross)
VAT Rate: 20%
System Calculation:
Net Price: 50 / 1.20 = €41.67
Total VAT: 50 - 41.67 = €8.33 (Total VAT)
Total Invoice Amount: €50.00 (Gross)
Result: Your invoice will show the gross price of €50, with a net price of €41.67 and VAT of €8.33.
Example 2: Switching from Net to Gross
Scenario: You initially enter a price of €100 as the net price and then decide to switch to gross pricing.
Enter Initial Price:
Quantity: 1
Price: €100 (Net)
VAT Rate: 18%
Switch to “Gross”:
The system recalculates:
Gross Price: €100 (Net) + €18 (VAT) = €118.00
Net Price: €118.00 / 1.18 = €100.00
VAT: €118.00 - €100.00 = €18.00
Result: The price remains €100 when switching, but the system now reflects this as a gross price, adjusting VAT and net price accordingly.
Example 3: Applying a Discount
Scenario: You offer a 10% discount on a total net price of €240 with an 18% VAT rate.
Apply Discount:
Original Net Price: €240
Discount: €240 x 10% = €24
Discounted Net Price: €240 - €24 = €216
System Calculation:
VAT on Discounted Price: €216 x 0.18 = €38.88
Total Gross Price: €216 + €38.88 = €254.88
Result: The system recalculates the VAT and gross amounts after applying the discount.
Ensure Legal Compliance with VAT
Issuing VAT-Compliant Invoices
To comply with VAT regulations, your invoices must include:
Your VAT Registration Number
Your Customer’s VAT Number (if applicable)
Date of Invoice
Itemized List of Goods/Services: Including net price, VAT rate, VAT amount, and gross price.
Total Net Amount, Total VAT, and Total Gross Amount
Our system automatically populates these fields based on your inputs, ensuring your invoices are VAT-compliant.
Tracking and Filing VAT
Keep Accurate Records: The system stores a digital record of all invoices, including VAT details, making it easy to track sales and VAT obligations.
File VAT Returns: Use the system’s reports to ensure you file accurate VAT returns on time, including the VAT you’ve collected and the VAT you can reclaim on business expenses.
Tips and Best Practices
💡 Double-Check VAT Rates: Always ensure the correct VAT rate is applied to each product or service.
You can change the VAT rate at any time. The system will automatically recalculate the amounts based on the new rate.
💡 Use the Price Switcher Wisely: Switching between Gross and Net will not change the input price but will affect how other amounts are calculated.
💡Preview Invoices Before Sending: Always review your invoices to ensure accuracy before sending them to customers.
💡You can switch from Gross to Net pricing after applying a discount. The discount will be recalculated according to the new price type, and all totals will be adjusted accordingly.
💡You cannot see both Net & Gross prices at the same time. You will see only the selected price type (Net or Gross) in the invoice. However, the system uses both types internally to ensure correct calculations.
If you ever feel uncertain about your VAT obligations, consider consulting with a tax professional. This guide is here to support you, but professional advice is invaluable when navigating tax regulations.
If you have any questions about using our invoicing, feel free to contact our customer support team from in-app chat or by email at [email protected]