1. What Is VAT?
Value Added Tax (VAT) is a consumption tax charged on most goods and services in the UK. Businesses registered for VAT must collect it from customers and pay it to HMRC, while also reclaiming VAT on eligible business purchases.
2. UK VAT Rates
- Standard Rate: 20% – Most goods and services.
- Reduced Rate: 5% – Certain goods like children’s car seats, home energy.
- Zero Rate: 0% – Most food, books, children’s clothing.
3. How to Add VAT to a Price
If you have a net (excluding VAT) price:
Formula:
Net Price × (1 + VAT Rate) = Gross Price
Example:
Net price = £100
VAT rate = 20% (0.20)
£100 × 1.20 = £120 (Gross Price)
4. How to Calculate VAT Amount from Net Price
Formula:
Net Price × VAT Rate = VAT Amount
Example:
Net price = £100
VAT rate = 20% (0.20)
£100 × 0.20 = £20 VAT
5. How to Calculate VAT from Gross Price
If you have a price including VAT and need to find the VAT amount:
Formula:
Gross Price ÷ (1 + VAT Rate) = Net Price
VAT Amount = Gross Price – Net Price
Example:
Gross price = £120
VAT rate = 20% (0.20)
£120 ÷ 1.20 = £100 (Net Price)
£120 – £100 = £20 VAT
6. How to Remove VAT from a Price
If you have a gross price:
- Divide by 1.20 for standard 20% VAT.
- Divide by 1.05 for reduced 5% VAT.
7. VAT Calculation for VAT Returns
When submitting your VAT return:
- Output VAT = VAT you’ve collected from customers.
- Input VAT = VAT you’ve paid on business purchases.
- VAT Payable = Output VAT – Input VAT.
If Input VAT > Output VAT, HMRC refunds you.
8. Common VAT Calculation Mistakes
- Using the wrong VAT rate.
- Forgetting to apply VAT to delivery charges (when applicable).
- Miscalculating when working backwards from gross prices.
Frequently Asked Questions
Q1: How do I calculate VAT on discounts?
Apply the discount first, then calculate VAT on the reduced price.
Q2: Can I charge VAT if I’m not registered?
No, you must be VAT registered with HMRC to charge VAT.
Q3: Do all goods and services have VAT?
No, some are zero-rated or exempt.
Q4: How do I calculate VAT in Excel?
Use a formula like =NetPrice*0.2 for VAT amount or =NetPrice*1.2 for gross price.
Q5: How often do I calculate VAT?
Whenever you set prices, issue invoices, or prepare VAT returns.
Q6: Is VAT the same across all UK businesses?
Yes, but some industries have special VAT rules.
Conclusion
VAT calculation is straightforward once you know the formulas. Whether adding VAT, removing it, or working out amounts for VAT returns, accurate calculations help you stay compliant with HMRC and keep your business finances in order.