Adding VAT and taking it out
VAT is charged as a percentage of the price without VAT, called the net price. The net price plus VAT is the gross price. As formulas, with the rate as a decimal:
- To add VAT: gross = net × (1 + rate). A net price of 100 at a rate of 20% is 100 × 1.2 = 120, and the VAT is 20.
- To take VAT out: net = gross ÷ (1 + rate). A gross price of 120 at 20% is 120 ÷ 1.2 = 100, and the VAT is 20.
These rates are examples. Use the rate that applies to your goods and your country, because the calculator assumes none.
The mistake to avoid when removing VAT
The common error is to take the VAT rate off the gross price. 20% off 120 gives 96, but the real net price is 100. The VAT was 20% of the net price, and 120 is already bigger than that, so the same percentage of 120 is too much.
The share of a gross price that is VAT is rate ÷ (100 + rate), which is smaller than the rate itself: 16.67% at a rate of 20%, 9.09% at 10% and 4.76% at 5%. The calculator shows this share for your rate. It is the fraction of what a customer pays that goes to tax.
How VAT works for a business
In a VAT system, a business that is registered charges VAT on what it sells (output VAT) and can usually reclaim the VAT it paid on business purchases (input VAT). It pays the difference to the tax authority. The final customer cannot reclaim it, so that is who carries the cost. Who must register, what is exempt and which rate applies all depend on the country, so check with your tax authority.
Invoices often add up VAT for each line or for the whole invoice, and the two ways of rounding can differ by a few cents. This calculator rounds once, on the amount you enter: the VAT when you add it, and the price without VAT when you take it out, with the VAT as the difference. For the effect of a tax on a sale price, see the discount calculator.