The rule that keeps tax correct
Tax is calculated on the value after any discount, and shown as its own line. Never roll tax into unit prices, and never apply it to the pre-discount subtotal when the customer is only paying the discounted amount.
Two ways to apply it
One rate on the whole invoice
Everything you supply carries the same rate. The tool applies it to the subtotal after discount and shows one tax line. This is the simplest case and covers most businesses.
A rate per line item
Different lines carry different rates — standard-rated goods alongside zero-rated ones, or a service taxed differently from a product. A tax percentage column appears in the table and each line is taxed on its own value.
A worked example
Two items, a 10% discount, tax at 20%:
| Step | Calculation | Amount |
|---|---|---|
| Item 1 — 10 × 40.00 | quantity × rate | 400.00 |
| Item 2 — 3 × 85.50 | quantity × rate | 256.50 |
| Subtotal | 400.00 + 256.50 | 656.50 |
| Discount 10% | 656.50 × 0.10 | -65.65 |
| Taxable value | 656.50 − 65.65 | 590.85 |
| Tax 20% | 590.85 × 0.20 | 118.17 |
| Total | 590.85 + 118.17 | 709.02 |
Note the order. Applying 20% to 656.50 would give 131.30 and overcharge the customer by 13.13 — a mistake that is easy to make in a spreadsheet and impossible in a tool that applies the discount first.
How a discount interacts with per-line tax rates
If lines carry different rates, an invoice-level discount has to be spread across them, otherwise you would be arbitrarily choosing which line the concession comes off. The correct approach is to reduce each line in proportion to its share of the subtotal, then apply that line’s own rate to the reduced value. That is what the invoice creator does.
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Rounding
Round to two decimal places at each stage rather than at the end, and add up the rounded figures. That way the printed lines genuinely sum to the printed total. Accumulating unrounded values and rounding once at the end produces invoices that are a cent out — small, but it makes a customer check everything else too.
Tax-inclusive pricing
In some markets prices are quoted with tax included. If you display a tax-inclusive price and need to show the tax separately, extract it rather than adding it on top: for a 20% rate, tax equals the gross divided by 1.2, subtracted from the gross. A gross of 120.00 contains 20.00 of tax and 100.00 net. If you enter 120.00 as the net rate and add 20%, you will overcharge.
What else the invoice needs
- Your tax registration number
- The customer’s registration number, where required
- The rate applied, visible on the tax line
- The net value, the tax and the gross total, all separate
- The correct wording, such as “Tax Invoice”, where your jurisdiction requires it
See the tax invoice generator guide for VAT and GST specifics.
This explains how to present tax on an invoice. Which rate applies, whether you must register and what your invoices must show are questions for your tax authority or accountant.
Questions
Is tax calculated before or after a discount?
After. The customer pays the discounted amount, so that is the taxable value. Calculating tax on the pre-discount subtotal overcharges them.
Can different items have different tax rates on one invoice?
Yes. Choose per-line tax and each row carries its own rate, which is necessary when you mix standard-rated and zero-rated items.
How do I show tax-inclusive prices?
Extract the tax from the gross rather than adding it on. At 20%, divide the gross by 1.2 to get the net; the difference is the tax.
Should I round each line or only the total?
Round each line, then add the rounded figures. It is the only way the printed lines add up to the printed total.
Do I need a tax number on the invoice?
If you are registered, almost certainly — and your customer may not be able to reclaim without it. Check your own tax authority’s requirements.
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