VAT versus sales tax explained for contractors

Published January 26, 2026 · 2 min read

VAT versus sales tax explained for contractors, with a worked example, a checklist and the mistakes to avoid.

Why this matters for contractors

Contractors often have uneven income and expenses, which makes estimating tax in advance especially useful.

Worked example

Here is the calculation with sample figures. Change any number in the Tax Calculator to run your own.

VAT versus sales tax: how it works

A sales tax is collected once, at the final sale. VAT is collected at every stage, with businesses reclaiming tax on their inputs.

For a shopper the effect looks similar, but for a business the mechanics, paperwork and cash flow are very different.

A second example with larger figures

Scaling the inputs up shows how the result moves. Percentages stay the same, so the tax grows in proportion to the amount it is applied to.

Using the calculator step by step

1. Open the Tax Calculator.
2. Enter your own figures on each numbered line.
3. Set the rate to the one that applies to you. Defaults are examples, not advice.
4. Read the result and the formula below it.

Key terms

Standard rate

The rate that applies to most goods and services unless a specific reduced rate, zero rate or exemption applies.

Effective rate

Total tax divided by total income, the average rate you actually pay.

Net amount

The amount before tax is added. On an invoice it is the figure the tax is calculated on.

Exempt supply

A sale that falls outside the tax entirely. No tax is charged and input tax usually cannot be reclaimed.

Withholding

Tax deducted at source, by an employer or payer, before the money reaches you.

A quick checklist for contractors

1. Identify which system applies where you sell.
2. Check registration thresholds.
3. Set up invoices that show tax correctly.

Common mistakes to avoid

• Assuming a US sales tax approach works for EU VAT.
• Forgetting to reclaim input VAT.

Frequently asked questions

This article is general information for planning, not tax advice. Rates and rules change; confirm with your tax authority or a qualified adviser.