Tax Inclusive vs Exclusive — How to Tell

Every invoicing tool asks some version of it: are your prices tax inclusive or tax exclusive? It sounds like a preference. It is not — it is a statement about what the numbers you typed already contain, and answering it wrongly changes what you charge by the entire tax rate.

Take £100 at 20% VAT. Read as exclusive, the VAT is £20 and the customer pays £120. Read as inclusive, the £100 already contains £16.67 of VAT and the customer pays £100. Same typed figure, same rate, a £20 difference — and if you send the wrong one you have either overcharged your customer or quietly absorbed the tax yourself.

The reliable test is who has already seen the price. If it is a number a consumer has been shown — on a website, a menu, a price list, a shelf edge — it almost certainly includes tax, because in the UK, the EU and most of APAC, prices displayed to consumers are required to. Extract the tax from it.

If it is a number you quote to another business — a day rate, a trade price, a figure in a proposal — it is usually exclusive, and tax goes on top. Business buyers reclaim the tax, so they think in pre-tax numbers and expect quotes in them.

When you genuinely cannot tell, work backwards from the total you intend to collect. Set the mode, look at the total, and see which one matches the number you had in your head. That check takes five seconds and catches the mistake before your customer does.

Adding tax is the easy direction: tax = net × rate ÷ 100. On £100 at 20%, that is £20, and the gross is £120.

Extracting it is where people slip. The instinct is to take 20% of the gross — 20% of £120 is £24 — and that is wrong, because the tax is 20% of the net, not of the gross. The correct form is net = gross × 100 ÷ (100 + rate). On £120 at 20%: 120 × 100 ÷ 120 = £100 net, so the VAT is £20. On £100 inclusive: 100 × 100 ÷ 120 = £83.33 net, VAT £16.67.

A useful sanity check: the tax inside an inclusive price is always a smaller fraction of it than the rate suggests. At 20%, tax is one sixth of the gross, not one fifth.

Once the mode is settled, the second question is where the rounding happens. Rounding once at the bottom gives a different answer from rounding each line and adding them, and the rule in the UK, the EU and most of APAC is per line.

The gap is usually a penny, occasionally two, and it is enough to get an invoice queried or a return flagged. It is also entirely avoidable: it exists only because a tool took a shortcut.

A related shortcut is worth knowing about. Money held as a decimal in ordinary floating-point arithmetic does not behave: 0.1 + 0.2 evaluates to 0.30000000000000004, and totals built that way can drift a penny apart from what the same figures give on paper. Holding every amount as a whole number of pence removes the problem rather than papering over it, which is how the ExactPic invoice tools work.

On an inclusive invoice, the line amounts should be the tax-inclusive figures your customer is actually being charged, so that quantity × unit price reconciles on the line. A line reading 2 × £100.00 = £166.67 looks like an arithmetic error even when the maths underneath is right, and it gets the invoice sent back.

The subtotal underneath should still be the tax-exclusive figure, with the tax shown separately and grouped by rate. That is the shape a VAT or GST return asks for, and it is the convention the mainstream accounting packages follow.

Say which convention you used, too. “Total (tax included)” at the foot of the document removes the ambiguity for whoever files it, at the cost of two words.