1. What Is VAT?
VAT (Value Added Tax) is a consumption tax charged on the sale of most goods and services in the UK. It is collected by businesses on behalf of the government and must be reported in VAT returns.
2. UK VAT Rates in 2024
- Standard Rate: 20% (applies to most goods and services)
- Reduced Rate: 5% (e.g., home energy, children’s car seats)
- Zero Rate: 0% (e.g., most food, books, children’s clothes)
Some goods and services are exempt (like education, insurance) or outside the scope of VAT (like wages).
3. How VAT Is Calculated – Adding VAT
To add VAT to a net price (before tax):
- Use the formula:
Gross Price = Net Price × (1 + VAT Rate)
Example (20% VAT):
Net price = £100
Gross price = £100 × 1.20 = £120
4. How VAT Is Calculated – Removing VAT
To remove VAT from a gross price (VAT-inclusive):
- Use the formula:
Net Price = Gross Price ÷ (1 + VAT Rate)
VAT Amount = Gross Price – Net Price
Example (20% VAT):
Gross price = £120
Net price = £120 ÷ 1.20 = £100
VAT = £120 – £100 = £20
5. Calculating VAT at 5% Rate
For reduced VAT rate:
Adding 5% VAT:
Net price = £100
Gross = £100 × 1.05 = £105
Removing 5% VAT:
Gross price = £105
Net = £105 ÷ 1.05 = £100
VAT = £105 – £100 = £5
6. When to Charge VAT
You must charge VAT if:
- You are VAT-registered
- Your taxable turnover exceeds £90,000 (UK threshold)
- You sell VATable goods or services
7. How to Report VAT
VAT-registered businesses must:
- File VAT returns quarterly
- Pay VAT due to HMRC
- Reclaim VAT on business-related purchases (input VAT)
Frequently Asked Questions
Is VAT calculated on total price or item price?
VAT is usually calculated per item, then totaled, but can also be added to the full net total.
Do all businesses need to charge VAT?
No, only VAT-registered businesses with taxable turnover over the threshold must charge VAT.
Can I reclaim VAT if I’m not registered?
No, only VAT-registered businesses can reclaim input VAT.
Is VAT calculated before or after discounts?
VAT is calculated after applying discounts to the net price.
How often do I pay VAT?
Typically every quarter, unless using a different accounting scheme.
Conclusion
Understanding how VAT is calculated helps businesses price correctly, stay compliant, and manage taxes efficiently. Whether you’re adding VAT to sales or reclaiming it on purchases, using the right formulas ensures accuracy in your VAT accounting.