Should I use net or gross pricing on my invoices?
There are two ways to show your prices on your VAT invoices: gross pricing or net pricing.
With invoicing software, you can easily change whether your product prices are shown with gross or net prices for each invoice you create. Both methods are equally valid ways to invoice, and it's important to know which pricing method your business uses.
This article explains the difference between gross and net prices on VAT invoices, shows how the different pricing methods will look on an invoice and suggests when each method may be most appropriate.
The difference between net and gross pricing on invoices
It should first be noted, regardless of whether you use gross or net pricing on your invoices, your invoice should always contain the same information. Our article “What information needs to be on an invoice?” details the different invoice fields that are required to create a legally compliant invoice.
Included in the mandatory invoice fields is a breakdown of the products and services that you provide: you must list the different products and services, and provide a price for each of these. This is where you can then choose whether to list your prices in net or gross format.
This decision will only make a difference to the individual invoice lines. The final total for the invoice will be identical, regardless of which pricing method you use.
Invoicing with gross prices
Gross pricing means that the price that you set for a product or service is reflected directly in your invoices. The gross cost includes all aspects of the purchase of raw materials, labour, etc. in the sale price.
In your invoice template, the gross price also takes into consideration the applicable VAT rate. On the invoice, the VAT that is due will still be broken down and show the ‘Subtotal before VAT’ in the final lines of your invoice body.
An invoice that uses gross pricing will look like this:
Here, you can see that the invoice uses gross pricing as the amount in the item line says £360. This is different from the price (£300), which means that the VAT has already been added.
Invoicing with net prices
If you choose to create your invoices using net pricing, all of your prices for your products and services will be shown first without VAT. It also means that it's the price before any deductions are made, such as CIS.
For example, if you sell coffee machines, you would see the price of the coffee machine before VAT is added. You would then see the subtotal before VAT added.
The gross total (i.e. the final amount due) is then determined by adding the necessary VAT.
In the UK, VAT is charged at 20%, 5% or 0%. There are also tax-exempt products and services.
An invoice that uses net pricing will look like this:
Here, the espresso machine costs £300. This product is subject to 20% VAT, according to UK taxation. Whilst it's noted that the item should have VAT added in the item line, this is not reflected in the prices until after the subtotal. Only after that, do you then see £60 is due in VAT, and this is added to the final total.
Should your invoice template use net or gross pricing?
If you are a VAT-registered business, it's up to you whether you'd like to use net or gross pricing on your invoices, and it depends on what industry you work in. It's advisable to look at industry standards to see how other companies commonly write their prices on their invoices. However, there are a couple of general norms that you can follow.
If you primarily deal with B2C sales, it may be easier for you to use the gross pricing format. Your customer can then see the total price that they'll have to pay, and if they want to know the net price of the goods or services, they can subtract the added tax. This is a suitable method for invoicing private customers as they won't have to reclaim VAT.
If however, you deal with business-to-business (B2B) sales, it may be better to use net prices. If the receiving business is also VAT registered, they'll be able to claim back any VAT that they have been charged. Therefore, they'll be more interested in knowing the total price without the VAT included (i.e. the net price) as this is ultimately all they will have to pay.
Whichever way you choose to show your VAT, your invoicing software will automatically show the correct prices. If you decide to use Word or Excel invoice templates, you may need to work out your VAT manually and input the correct net and gross prices.
What pricing method do I use if I am not VAT registered?
If you are not VAT registered, the simple answer is neither: as you do not work with VAT, your invoices will simply show the price of the product or service. You don't need to worry about gross or net pricing, as these are only used for VAT invoices.
Net vs. gross pricing - summary
To choose between gross and net pricing on your invoices is to choose whether you want to show your prices initially with or without VAT.
Net pricing will first show the prices of your products and services without VAT. This is most useful for B2B sales.
Gross pricing will show the prices of your products and services with VAT already added. This is standard practice for B2C sales.
Invoicing software, like SumUp Invoices, can help you create compliant invoices quickly, and easily switch between net and gross pricing.
