What Is VAT and How Does It Work
Value Added Tax is a consumption tax applied to most goods and services in the UK and across the European Union. It is collected by businesses on behalf of the government and charged at the point of sale. The standard UK VAT rate is 20%. A reduced rate of 5% applies to items such as domestic fuel and children's car seats. Some goods and services are zero-rated, meaning they are still VAT-registered supplies but no tax is actually charged.
Adding VAT to a Net Price
When you know the net price of an item (the price before VAT) and want to find the total price a customer pays, you add VAT to the net figure. To do this manually, multiply the net price by the VAT rate as a decimal and add the result. For example, a net price of 100 pounds at 20% VAT equals a gross price of 120 pounds. This tool does the calculation instantly for any rate.
Removing VAT from a Gross Price
Removing VAT from a gross price tells you the net value before tax was applied. This is sometimes called reverse VAT or backing out the VAT. To do it manually, divide the gross price by one plus the VAT rate as a decimal. For a 20% VAT rate, divide by 1.2. For a 5% rate, divide by 1.05. This comes up when you receive an invoice that includes VAT but need to record the net amount in your accounts.
VAT Registration and Record-Keeping
UK businesses with taxable turnover above the VAT threshold, currently 90,000 pounds, must register for VAT. Registered businesses must charge VAT on sales, reclaim VAT on eligible purchases, and submit regular VAT returns to HMRC. Accurate record-keeping of net amounts, VAT amounts, and gross totals is essential for compliance. This calculator helps businesses quickly verify amounts when preparing invoices, checking supplier bills, or reconciling accounts.