How to Calculate VAT? A Guide

Even though VAT is paid in various stages of manufacturing a product, it is said that the tax is due to the final consumer. Typically, buyers of products and services can find the VAT rate and share of the price on their receipt, but in some cases, they need to calculate it themselves. In this article, the 1StopVAT team will explain how to work out VAT in different scenarios and calculate VAT inclusive and exclusive prices.

Before working out VAT

Prior to calculating a VAT-inclusive and VAT-exclusive prices or working out VAT backwards, you must know what the VAT rate applied to the particular product or service is. The standard VAT rate in the UK is 20%, while reduced VAT rates can drop to 15%, 10%, or 5%. Some services such as professional healthcare and education are VAT exempt, while certain goods like books or children’s clothes are subject to a zero VAT rate. If unsure what VAT rate you should use in your calculations, you can learn the applicable VAT rate by visiting the HMRC website.

How to work out VAT inclusive prices?

To calculate a price that includes VAT, you should simply multiply the price of a good or a service by 1.2 (when the VAT rate is 20%) or 1.1 (when the VAT rate is 10%).

How to work out VAT-exclusive prices?

A VAT-exclusive price is a total figure after subtracting the VAT rate. In order to work out VAT exclusive price, you should divide the total price by 1.2 (for the standard VAT rate of 20%).

How to work out VAT from gross price?

Working out VAT when only the gross price and VAT rate are available takes several steps. First of all, you need to divide the total price (including VAT) by 100+VAT rate (for example, 110 for reduced VAT goods). Then, multiplying your result by 100, you will get a pre-VAT price. And if you want to learn the VAT share of the price, you can either take the pre-VAT price from the total cost or simply multiply the first result by the VAT rate applicable.

Automating the ways to work out VAT

Many tools help to simplify VAT calculation. If you are used to working with programs like Microsoft Excel, you can add the VAT calculation formulas in the sheet and use the application as a comprehensive price computation tool. In case you are searching for a quick and easy solution, you can try one of the free online VAT accounting and backwards VAT calculation tools.

How to charge VAT on discounted goods?

Calculating VAT on discounted goods and services and promotions is not as straightforward as accounting for VAT when selling for regular prices.

  • Discounts and gifts. When it comes to promotional deals, VAT is usually charged on the discounted price while gifts are typically charged on their full value. In the UK, an exemption is applied on gifts given to the same person when the yearly value of these gifts does not exceed £50.
  • Discounted product bundles. Whenever a seller offers multi-buys, the VAT is charged on the combined priced or ‘apportioned’ if the products have a different VAT rate values.
  • Coupons and vouchers. If vouchers are distributed for free, no VAT is charged. However, if money-off coupons and vouchers are for sale, VAT is due on the price charged. Face value vouchers are VAT exempt when they are sold below their monetary value.
  • 1+1 deals. For buy one, get one for free discounted goods, VAT is apportioned as on mixed-rate goods.
  • Free goods and services. Free samples, services, and free loans are VAT exempt when no goods and services are received in return. Exceptions apply to gifts that exceed the £50 total value in 12 months.