Calculating VAT looks simple until you try to remove 20% from a gross price and end up with the wrong answer. This guide covers the four calculations you need: adding VAT to a net price, removing VAT from a gross price, finding just the VAT element, and switching between the standard 20% and reduced 5% rates. Every step uses plain arithmetic that works on the back of a napkin.
The three numbers in every VAT calculation
Every VAT calculation involves three numbers, and confusing them is the source of almost every mistake people make:
- Net: the price excluding VAT (the figure the seller keeps)
- VAT: the tax itself, calculated as a percentage of the net
- Gross: the total a customer pays (net plus VAT)
The relationship is simple: Net + VAT = Gross. Once you know which one you have, you can work out the others.
Adding VAT to a net price
If you have a net price (excluding VAT) and want to know what to charge a customer, you add the VAT on top:
| Step | Calculation | Example (£100 net at 20%) |
|---|---|---|
| 1. Calculate VAT | Net × (Rate / 100) | 100 × 0.20 = £20 |
| 2. Add to net | Net + VAT | 100 + 20 = £120 |
| Shortcut | Net × (1 + Rate / 100) | 100 × 1.20 = £120 |
For the 5% reduced rate, multiply by 1.05 instead of 1.20. For 0%, the gross equals the net.
Removing VAT from a gross price
This is where most mistakes happen. If you have a gross price and want to find the net, you cannot simply subtract 20%. The 20% was added to a smaller base, so subtracting 20% of the larger gross figure overshoots:
The wrong way: £120 − 20% = £96 (this is wrong by £4)
The right way: £120 / 1.20 = £100 (correct)
The mathematical reason: 20% of £100 (the original net) is £20, but 20% of £120 (the gross) is £24. To reverse the calculation, divide by 1 plus the rate, not subtract the rate.
| Step | Calculation | Example (£120 gross at 20%) |
|---|---|---|
| 1. Find the net | Gross / (1 + Rate / 100) | 120 / 1.20 = £100 |
| 2. Find the VAT | Gross − Net | 120 − 100 = £20 |
Finding just the VAT element of a gross price
If you only need the VAT amount itself (for example, to claim it back on a business expense), there is a quicker shortcut. Multiply the gross by the VAT fraction:
| VAT Rate | VAT Fraction | Example (£120 gross) |
|---|---|---|
| 20% standard | 1/6 (or multiply by 0.16667) | 120 / 6 = £20 |
| 5% reduced | 1/21 (or multiply by 0.04762) | 105 / 21 = £5 |
The 1/6 shortcut works because at 20% VAT, the VAT is 20% of the net, which is 1/6 of the gross. Worth committing to memory if you process invoices regularly.
Worked examples
Example 1: A service invoice
A consultant quotes £800 for a piece of work, plus VAT. The customer asks what the total bill will be.
- Net: £800
- VAT (20%): 800 × 0.20 = £160
- Gross to invoice: £960
Example 2: an expense claim
You spend £54 on stationery and need to record both the net cost and the VAT for your records:
- Gross: £54
- Net: 54 / 1.20 = £45.00
- VAT: 54 − 45 = £9.00 (or 54 / 6 = £9.00)
Example 3: A domestic energy bill (5% reduced rate)
Your gas bill comes to £84 including VAT at 5%:
- Gross: £84
- Net: 84 / 1.05 = £80.00
- VAT: £4.00
When VAT calculations get tricky
Mixed-rate invoices
If an invoice contains items at different VAT rates (for example, a hotel bill with food at 20% and accommodation at 20% but newspapers at 0%), each line must be calculated separately. You cannot apply a blended rate to the total.
Rounding
HMRC allows rounding to the nearest penny on individual lines, but the total VAT must equal the sum of the line VATs. Most accounting software handles this automatically. The rules are stricter for retail receipts than for trade invoices.
Discounts
VAT is calculated on the discounted price, not the headline price. If you apply a 10% trade discount to a £100 net invoice, the VAT is calculated on £90 (so £18 VAT) not £100.
Skip the manual arithmetic. Use the calculator to add or remove VAT in one step.
Open the VAT Calculator