Sales tax vs VAT for small businesses

Adrian Simpson, IT professional and web developer for 20+ years, has invoiced across enough borders to know where sales tax and VAT stop meaning the same thing. First published 2 August 2026; revised 14 August 2026.

Both add a percentage to what the customer pays. What differs is who collects it, at what point, and whether the price on the label already includes it. If you sell across borders, that last one causes more confusion than the tax itself.

Sales tax

Used in the US and, in a different form, Canada. It's charged once, at the final sale to the end customer. A wholesaler selling to a shop doesn't charge it, because that isn't the final sale. The shop charges it to the person walking out with the product.

Rates are set locally, which is what makes it awkward. In the US a rate can combine state, county, and city portions, so two addresses twenty minutes apart can carry different totals. There's no single national rate to look up.

VAT

Used across the UK, the EU, and much of the rest of the world, sometimes under another name like GST. It's collected at every stage of the chain, and each registered business claims back the VAT it paid on its own purchases.

The effect is that the tax lands on the end consumer, same as sales tax, but the collecting is spread across everyone in the chain. For a registered business, VAT on what you buy is money you get back, so it isn't a cost. For a consumer it just is.

Tax-inclusive or tax-exclusive pricing

This is the part that trips people up on international sales. In the US, prices are quoted before tax and the total goes up at the till. In the UK and EU, consumer prices must be shown with VAT already in them.

A £120 price in a UK shop with 20% VAT already contains £20 of tax. The pre-tax amount is £100, not £96. To pull tax out of an inclusive price you divide, you don't subtract:

The sales tax and VAT calculator has a mode for this, so you can work in either direction without thinking about it.

Registration

Most VAT countries set a turnover threshold. Under it you don't have to register, over it you must. Once registered you charge VAT on your sales, reclaim it on your purchases, and file returns on a schedule.

The US works differently again, on the idea of nexus. Having enough of a presence or enough sales in a state creates an obligation to collect there, and the rules vary state by state.

Thresholds and rates change regularly, so check the current figures with your own tax authority rather than trusting any number you read online, this page included.

Selling digital products and services

This is where small businesses get caught out most, because the old assumption was that tax follows where you are. For digital sales it usually follows where the customer is.

Sell an ebook, a template, a course, or a subscription to a consumer in a VAT country and the VAT due is generally their country's rate, not yours. Selling the same thing to buyers in six countries means six rates. Most countries run a simplified scheme so you can register and file in one place rather than in each, and many set the threshold for this at zero, meaning the obligation starts on the first sale rather than after some comfortable turnover figure.

The US version is economic nexus. Selling enough into a state creates an obligation to collect there even with no office or staff in it, and thresholds are commonly set around a dollar figure or a transaction count per year. Each state sets its own, and they've been revised repeatedly since the rules changed.

One thing that helps: if you sell through a marketplace or a major app store, the platform is often the one legally responsible for collecting and remitting, not you. Worth confirming for each platform you use, because it's the difference between a filing obligation and none.

The reverse charge

Sell a service business to business across a border in the VAT world and you often charge no VAT at all. The buyer accounts for it at their end instead, at their rate, and reclaims it in the same return. The net effect for them is usually zero, which is the point.

What you have to do is straightforward. Get and check their VAT registration number, show it on the invoice next to your own, charge zero VAT, and add a note saying the reverse charge applies. Leave any of that off and it may not be a valid invoice, which becomes your problem when someone asks why no tax was charged.

Registering before you have to

Under the threshold, registering is usually optional. It's worth thinking about rather than defaulting to no.

Registering voluntarily lets you reclaim VAT on what you buy, which is real money if you're spending on equipment, software, or stock. It also removes the moment where you cross the threshold and have to add 20% to your prices, which is much harder with existing customers than starting there.

Against that: returns to file, records to keep, and if you sell to consumers, an immediate choice between raising prices or absorbing the tax out of your margin. Selling mainly to registered businesses, that objection mostly disappears, because they reclaim what you charge and only compare pre-tax figures anyway.

Rough rule: selling business to business with real expenses, registering early often pays. Selling to consumers with few costs, staying under is usually simpler.

What it means for quoting

Say which you're quoting. "£4,000 plus VAT" and "£4,000 including VAT" are £800 apart, and a client who assumed the wrong one will be unhappy at invoice time.

Selling to consumers in a VAT country, quote inclusive, because that's what they'll be shown and often what the law requires. Selling business to business, quote exclusive, since they'll reclaim it anyway and the pre-tax number is the one they're comparing.

On the invoice

Show the rate and the tax amount as their own lines, whichever system you're in. A VAT-registered client needs that breakdown to reclaim, and a US client with an exemption needs to see what was charged.

If you're registered, your registration number goes on the invoice too. In most VAT countries an invoice without it isn't a valid VAT invoice, and your client can't use it.

Work out a figure

The sales tax and VAT calculator handles both directions, plus discounts and shipping. For the order those get applied in, see sales tax on discounts and shipping.

General guidance only, not tax advice. Rules on sales tax and VAT differ by country and change over time, so check current rules with a professional before you rely on them.