Ordering from Non-Registered Freelancers — Transitional Measures Under the Invoice System

This section clarifies what tax implications ordering from an Invoice System-unregistered freelancer has on the ordering party.

Consider the case of manufacturing company A, which has been commissioning 5 million yen worth of design work annually to a freelancer. The company had previously been able to claim input tax credits on the full 500,000 yen consumption tax. But if the contractor chooses not to register under the Invoice System, from October 2023 the creditable amount drops to 400,000 yen (80%), with the 100,000 yen difference becoming an effective cost increase.

This situation is spreading nationwide. According to a survey by the Small and Medium Enterprise Agency, approximately 60% of freelancers and sole proprietors have declined to register for the Invoice System. Client businesses are now losing part of the input tax credit they previously took for granted.

The problem deepens further. The transitional measures are structured on a gradual six-year reduction schedule, with the credit rate falling to 50% from October 2026. In the example of Company A, the company will ultimately need to absorb a cost increase of 250,000 yen.

This impact goes beyond one-off transactions. For companies with ongoing service contracts, the cumulative annual cost increase creates significant distortions in budget planning. In industries with thin margins, even a few percent cost increase can have a severe impact on management.

The effects on ordering parties are not limited to tax. Maintaining ongoing collaborative relationships with excellent freelancers while preserving economic rationality requires a difficult balancing act. Responding to orders from non-registered freelancers has evolved beyond a simple accounting issue into an important strategic business decision.

This section provides a detailed explanation of the specific mechanics of the transitional measures and the credit rate change schedule that ordering parties need to understand.

The Invoice System transitional measures represent a six-year transition period designed to ease the shock of sudden increased burdens when the system was introduced. For input tax credits on purchases from tax-exempt businesses, restrictions are applied on a staged schedule as follows.

Phase 1: October 1, 2023 – September 30, 2026 (3 years)

Credit rate 80% — up to 80% of the consumption tax amount is creditable

Phase 2: October 1, 2026 – September 30, 2029 (3 years)

Credit rate 50% — up to 50% of the consumption tax amount is creditable

Full Implementation: From October 1, 2029

Credit rate 0% — no credits allowed at all

Let's verify with a specific calculation. For a monthly service contract of 1 million yen (excluding tax):

Up to September 2023: Input tax credit 100,000 yen (full amount) October 2023 – September 2026: Input tax credit 80,000 yen (80%) October 2026 – September 2029: Input tax credit 50,000 yen (50%) From October 2029: Input tax credit 0 yen

On an annual basis, the non-creditable portion increases from 240,000 yen (Phase 1) to 600,000 yen (Phase 2) to 1,200,000 yen (after full implementation).

An important note is that the credit rate is determined by the "tax period," not the "payment date." For a March fiscal-year company, payments made in April–September 2026 still qualify for the Phase 1 80% credit. Individual business owners, on the other hand, use the calendar year, so January–September 2026 payments are at 80%, and October–December 2026 are at 50%.

Applying the transitional measures requires confirming that the payee "is a tax-exempt business." Determination is based on whether the other party has a qualified invoice issuer registration number, but registration status can change during the year. It is recommended that quarterly registration status checks be incorporated into accounting workflows.

It is also important to understand that the transitional measures are designed for "gradual mitigation" and are not a permanent system. From October 2029 onward, no input tax credit will be allowed for payments to non-registered businesses — representing a significant change that effectively means a 10% cost increase for ordering parties.

This section presents step-by-step practical procedures for ordering from unregistered freelancers, from initial confirmation through accounting treatment.

Pre-Order Confirmation

First, confirm whether the freelancer being considered for the project is a registered qualified invoice issuer. The National Tax Agency's "Qualified Invoice Issuer Public Notification Site" allows searching by business name or registration number. However, for sole proprietors, searching by name can be difficult, so directly requesting the person's registration number is more reliable.

Create a registration status confirmation sheet and record the following:

• Business name (for sole proprietors: full name and trade name)
• Qualified invoice issuer registration number (record "none" if not registered)
• Confirmation date
• Confirmation method (public site search, direct confirmation, etc.)
• Future registration plans (confirmed directly with the individual)

Adjustments to Contracts and Purchase Orders

For orders from non-registered freelancers, the contract must explicitly state how consumption tax is handled. A standard example:

"If Party B (the contractor) is not a qualified invoice issuer, Party A (the ordering party) will pay the consumption tax equivalent amount, with the understanding that input tax credits will be subject to the restrictions defined by the applicable transitional measures under applicable law."

The conventional wording "consumption tax additional" does not make clear how credit restrictions under the transitional measures are handled. An explicit provision like the above can prevent disputes later.

In purchase orders, state the expected payment amount as "base price + consumption tax equivalent" and note the other party's registration status. Example: "Design fee 500,000 yen + consumption tax equivalent 50,000 yen = total 550,000 yen (qualified invoice issuer: not registered)"

Points to Check When Receiving Invoices

When ordering from a tax-exempt business, the document received is a "categorized invoice" rather than a "qualified invoice." Required content is as follows:

• Name or title of the invoice issuer
• Transaction date
• Transaction description
• Consideration amount (tax-inclusive)
• Name or title of the recipient

While "registration number," "tax rate category," and "consumption tax amount" required for qualified invoices are not needed, the above five items are mandatory in order to apply the transitional measures.

Accounting Treatment in Practice

When entering journal entries, clearly separate the creditable and non-creditable consumption tax amounts. For a 1,000,000 yen service fee (consumption tax 100,000 yen):

Example treatment for October 2023 – September 2026:

Service fees 1,000,000 yen / Accounts payable 1,100,000 yen
Deferred consumption tax 80,000 yen
(Non-creditable) 20,000 yen

The non-creditable consumption tax of 20,000 yen is treated as either "taxes and public charges" or included in "service fees." Whichever treatment is chosen should be determined in advance as an accounting policy and applied consistently.

For companies using accounting software, setting up a "Invoice System registration flag" in the supplier master and building automated determination logic can prevent processing errors.

This section explains methods for adjusting contract terms and key medium-to-long-term budget management points in light of the gradual cost increases from the transitional measures.

Strategies for Adjusting Order Unit Prices

For contracts with unregistered freelancers, adjusting unit prices to reflect effective cost increases is an unavoidable issue. However, one-sided demands for price reductions risk causing talented people to leave.

As a realistic approach, a "phased adjustment method" is recommended. First, maintain the current tax-inclusive order amount and absorb the non-creditable portion internally for a period. Then, at contract renewal time, consider the following adjustments:

• Clarify quality standards for deliverables and seek higher value-add
• Expand scope of work to increase the workload per unit price
• Adjust unit prices in exchange for stable long-term orders

As a specific example, for a 500,000 yen/month website management contract (excluding tax): Current: pay 550,000 yen, credit full 50,000 yen Phase 1: pay 550,000 yen, credit 40,000 yen (effective cost increase of 10,000 yen) Phase 2: pay 550,000 yen, credit 25,000 yen (effective cost increase of 25,000 yen)

An approach to address this increase could be expanding the managed sites from 2 to 3, thereby adjusting the workload per unit price to 1.5x.

Strategic Setting of Contract Periods

Given the staged changes in transitional measures, contract period setting is also an important strategic element. Contracts that span the October 2026 rate change deserve particularly careful consideration.

Recommended contract period settings:

• New contracts: through end of September 2026 (completed within Phase 1)
• Renewal contracts: set October 2026 or October 2029 as renewal dates
• Long-term contracts: build in a three-year review cycle with provisions for adjusting terms to match credit rate changes

Include a "clause for reviewing terms in response to Invoice System transitional measure changes" in contracts. Example: "If the input tax credit rate changes due to amendments to applicable law, Party A and Party B may discuss and revise contract terms."

How to Reflect This in Budget Planning

Medium-term business plans and annual budgets need to incorporate the staged cost increases from the transitional measures. For industries with high outsourcing ratios, the impact can be significant.

For a company with 20 million yen in annual outsourcing costs (2 million yen consumption tax), where 60% goes to non-registered businesses:

• Phase 1 increase: 240,000 yen/year (20% of 1,200,000 yen in creditable amount)
• Phase 2 increase: 600,000 yen/year (50% of 1,200,000 yen in creditable amount)
• After full implementation: 1,200,000 yen/year (full non-creditable amount)

Consider addressing these increases through the following means:

1. Passing costs to customers through price negotiations
2. Reducing costs through productivity improvements
3. Reviewing supplier base (switching to registered contractors)
4. Reducing outsourcing through in-house production

Particularly important is ensuring adequate lead time by working backward from the full implementation in October 2029. Switching suppliers or building in-house capacity takes time, so specific countermeasures should begin no later than around 2027.

This section presents practical errors that ordering parties commonly make in transactions with non-registered freelancers, along with specific countermeasures.

Misunderstanding Which Credit Rate Applies

The most common mistake is thinking of the transitional measure credit rates as fixed at the point of contract signing. In practice, determination is made on a per-tax-period basis, so for long-term contracts the credit rate may change during the contract period.

Example of incorrect understanding: An annual contract signed in April 2025 has 80% credit applied for the entire contract period Correct treatment: 80% credit for April 2025 – September 2026 payments; 50% credit for October 2026 – March 2026 payments

To prevent this misunderstanding, it is recommended to create a "credit rate determination calendar" for accounting staff that explicitly states the credit rate for each tax period. Also, register period-specific credit rates in accounting software in advance and set up automated calculation.

Failing to Update Tax-Exempt Business Status

If a contractor registers for the Invoice System during the year, accounting treatment must be switched promptly. However, it is common for such registration status changes to be detected late.

As a countermeasure, institutionalize a "registration status check procedure" on a quarterly basis. Confirmation targets are:

• All individual business owners and tax-exempt businesses with ongoing transactions
• Businesses with whom you have newly started transacting
• Businesses previously noted as "considering registration"

In addition to searching the National Tax Agency's public site, direct confirmation should also be used. If a registration number is confirmed, processing needs to be corrected retroactively from the registration effective date.

Deficiencies in Consumption Tax Provisions in Contracts

Stating only "consumption tax additional" under traditional wording leaves the handling of credit restrictions under the transitional measures ambiguous. This ambiguity is causing misunderstandings between ordering and contracting parties.

Common deficiencies:

• Unclear how the effective cost increase from credit restrictions is handled
• No description of how to handle consumption tax rate changes
• No specification of how terms change when the contractor registers

Improved provision example: "The consideration under this agreement includes the consumption tax equivalent, and Party A shall bear the input tax credit restrictions applicable when Party B is not a qualified invoice issuer. However, if Party B becomes a qualified invoice issuer, Party A and Party B may discuss and revise the consideration."

Processing Errors Due to Increased Accounting Complexity

The separation of creditable and non-creditable consumption tax has made accounting treatment more complex than before. Particularly for companies transacting with multiple tax-exempt businesses, processing errors are common.

Typical errors:

• Processing the credit rate as 100% (continuing previous processing)
• Incorrect account classification for non-creditable consumption tax
• Missing treatment changes at monthly/annual credit rate transitions

To prevent these errors, implement the following:

1. Create dedicated journal entry templates for tax-exempt business transactions
2. Introduce a monthly closing checklist for verifying credit amounts
3. Conduct regular processing reviews with a tax advisor

Rigidity in Supplier Selection Criteria

A rigid stance of "won't order from non-registered suppliers" can also create opportunity losses over the long term. Maintaining collaborative relationships with excellent freelancers while securing economic rationality requires a balanced approach.

Rational decision criteria:

• Cost comparison of order amount versus credit restriction impact
• Availability of alternative suppliers
• Comprehensive evaluation of quality, delivery, communication, etc.
• Value of long-term collaborative relationship

Building a framework that evaluates not just tax costs but overall business impact leads to a sustainable ordering strategy.

As an ordering party, the most important thing is to use the six years of transitional measures strategically as an "adjustment period." Making effective use of this time and steadily preparing for the full implementation in October 2029 is essential.

The first thing to do is a comprehensive inventory of your current suppliers. Organize their Invoice System registration status, annual order amount, importance of the work, and replaceability, and clarify the response policy for each supplier. For excellent, hard-to-replace freelancers, it may be necessary to accept the current credit restrictions while maintaining long-term collaborative relationships.

Next, developing a medium-term budget plan that factors in the staged cost increases is critical. Significant cost increases occur at the Phase 1-to-Phase 2 transition (October 2026) and at full implementation (October 2029). Deciding in advance which of the following options — passing costs to customers, improving productivity, restructuring the ordering mix — will absorb these increases is essential.

For contract practice, introducing flexible contract provisions that can adapt to transitional measure changes is recommended. Build mechanisms that can respond appropriately to changing circumstances, including provisions for reviewing terms at credit rate changes, phased unit price adjustments in long-term contracts, and preferential treatment for contractors who register.

Finally, organizing the accounting infrastructure is also indispensable. Managing credit rates by period, tracking supplier registration status, and handling the more complex consumption tax processing all represent new workloads that require adequate organizational capacity. Strengthening collaboration with external tax advisors and accounting firms is also an option worth considering.

The Invoice System and its transitional measures are bringing major changes to ordering party–contractor relationships in the freelance economy. Viewing these changes as an opportunity to build a more efficient and sustainable ordering management framework will be the path to securing competitive advantage going forward. Make strategic use of the six-year transitional period and aim to establish an ordering framework suited to the business environment of 2030 and beyond.

References

Overview of the Act on Proper Transactions with Specified Consignment Business Operators (2024)

Guidelines for Creating an Environment Where Freelancers Can Work with Peace of Mind (2021)

Survey Results on Freelancer Working Conditions (2020)

Overview of the Qualified Invoice System (2023)