How to Calculate VAT in the UK (Add or Remove)
What is VAT?
VAT (Value Added Tax) is a tax on the sale of goods and services.
How VAT Works
A supplier sells materials for £100 + £20 VAT. The factory pays £120.
Supplier sends £20 VAT to the government.
A factory uses the materials to make a product and sells it for £200 + £40 VAT. The shop pays £240.
Factory collected £40 VAT, but deducts £20 VAT already paid, sending £20 to the government.
A shop sells the product to a customer for £300 + £60 VAT. The customer pays £360.
Shop collected £60 VAT, but deducts £40 VAT already paid, sending £20 to the government.
Final VAT Collection:
- Supplier pays £20 to the government.
- Factory pays £20 to the government.
- Shop pays £20 to the government.
Total VAT paid to the government: £60 (which the final consumer paid).
Components of VAT Calculation
Before we look at the calculation process, let’s understand the three key components of a VAT calculation:
- Net Price: The price of the goods or services before VAT is added.
- VAT Rate: The percentage of the value of goods or services that is charged as VAT.
- Gross Price: The total price after VAT is added.
VAT Calculation Formulas
The relationship between these components can be seen in the following formulas:
Gross Price = Net Price + (Net Price × VAT Rate)
Or
Gross Price = Net Price x (1 + VAT Rate)
Alternatively, if you have the gross price and need to calculate the net price:
Net Price = Gross Price / (1 + VAT Rate)
And to calculate the VAT amount alone:
VAT Amount = Net Price × VAT Rate
Or
VAT Amount = (Gross Price x VAT Rate) / (1 + VAT Rate)
Example 1 – How to Calculate VAT from Net Price (Add VAT)
The net price is the price before VAT.
To calculate the gross price (price including VAT):
Net Price: £100
VAT Rate: 20%
Gross Price = Net Price + (Net Price × VAT Rate)
Gross Price = £100 + (£100 × 0.2)
Gross Price = £120
Or we can use the alternative formula:
Gross Price = £100 x (1 + 0.2)
Gross Price = £100 x 1.2
Gross Price = £120
Example 2 – How to Calculate VAT from Gross Price (Remove VAT)
The gross price is the price including VAT.
To calculate the net price (price excluding VAT):
Gross Price: £120
VAT Rate: 20%
Net Price = Gross Price / (1 + VAT Rate)
Net Price = £120 / (1 + 0.2)
Net Price = £120 / 1.2
Net Price = £100
Example 3 – How to Calculate VAT Amount
If you only need to find the VAT amount from a net price:
Net Price: £100
VAT Rate: 20%
VAT Amount = Net Price × VAT Rate
VAT Amount = £100 × 0.2
VAT Amount = £20
If you only need to find the VAT amount from a gross price:
Gross Price: £120
VAT Rate: 20%
VAT Amount = (Gross Price x VAT Rate) / (1 + VAT Rate)
VAT Amount = (£120 x 0.2) / (1 + 0.2)
VAT Amount = £24 / 1.2
VAT Amount = £20