1. What Is VAT?
VAT (Value Added Tax) is a consumption tax charged on most goods and services in the UK. Businesses registered for VAT must add VAT to their sales (output tax) and can reclaim VAT paid on business purchases (input tax).
2. Standard VAT Rates in the UK (2025)
- Standard rate: 20% (most goods and services).
- Reduced rate: 5% (e.g., energy-saving products, children’s car seats).
- Zero rate: 0% (e.g., most food, books, children’s clothes).
- Exempt items: Some financial, health, and education services.
3. How Do You Work Out VAT on Sales?
If you’re adding VAT to a price (exclusive of VAT):
Formula:
VAT = Price (excluding VAT) × VAT rate
Example:
Product price = £100 (ex. VAT)
VAT (20%) = £100 × 0.20 = £20
Final price (inc. VAT) = £100 + £20 = £120
4. How Do You Work Out VAT Included in a Price?
If the price already includes VAT and you need to find the VAT amount:
Formula:
VAT = Price (including VAT) × (VAT rate ÷ (100 + VAT rate))
Example:
Price (inc. VAT) = £120
VAT rate = 20%
VAT = £120 × (20 ÷ 120) = £20
Price (ex. VAT) = £120 – £20 = £100
5. How Do You Work Out VAT on Purchases?
If your business is VAT registered, you can reclaim VAT paid on business purchases.
Example:
Office chair costs £240 (inc. 20% VAT).
VAT = £240 × (20 ÷ 120) = £40
Business expense (ex. VAT) = £200
You can reclaim £40 from HMRC.
6. How VAT Returns Work
- Add VAT to your sales invoices (output tax).
- Record VAT paid on purchases (input tax).
- Submit VAT Return (usually quarterly).
- Pay HMRC the difference:
Formula:
VAT to Pay = Output VAT – Input VAT
If input VAT is higher than output VAT, HMRC refunds you.
7. Tools to Help Calculate VAT
- Accounting software (Xero, QuickBooks, Sage).
- HMRC VAT calculator.
- Manual spreadsheets for small businesses.
8. Common Mistakes to Avoid
- Forgetting to register for VAT when turnover exceeds £90,000 (2025 threshold).
- Charging the wrong VAT rate.
- Claiming VAT on exempt or personal expenses.
- Not keeping VAT invoices as proof.
Frequently Asked Questions
1. How do you work out VAT at 20%?
Multiply the net price by 0.20, then add it to the original amount.
2. How do I find VAT from a total price?
Divide the total by 1.20 (for 20% VAT) to get the net amount, then subtract.
3. Do I always need to charge VAT?
Only if your business turnover is above £90,000 and you’re VAT registered.
4. Can I reclaim VAT on all purchases?
No, only on eligible business expenses with a VAT invoice.
5. How often do I pay VAT?
Most businesses file and pay quarterly, though some pay monthly or annually.
6. Can I use flat rate VAT?
Yes, small businesses can use the Flat Rate Scheme to simplify VAT reporting.
Conclusion
The answer to how do you work out VAT depends on whether you’re adding VAT, extracting it from a total, or reclaiming it on purchases. By using the correct formulas and keeping accurate records, VAT becomes manageable and ensures compliance with HMRC rules.