Being able to calculate VAT is a key skill for those in business, or for consumers.
In this article we look at most of (if not all) the VAT calculations you need to know.
Here's what we discuss:
- What is VAT?
- How do I calculate VAT for goods or services?
- How do I calculate a price with the VAT deducted?
- How do I calculate the ex-VAT price from the VAT amount?
- Do I have to charge VAT?
- Do individuals have to charge VAT?
- Are goods or services ever VAT-free?
- How do I calculate my VAT bill?
- What’s a VAT invoice?
- What’s a VAT receipt?
- What is VAT charged on?
- What is the VAT rate?
- Do I have to list prices including VAT?
What is VAT?
Value Added Tax (VAT) is a type of tax applied at the point at which goods or services are sold to be consumed.
Putting it another way, and in general terms, VAT is typically paid by the end consumer that actually uses the goods or services.
For example, John buys a television for his living room. He pays £120 to the retailer. That comprises £100 for the television and £20 for VAT (assuming VAT is being charged at the standard rate of 20%).
John pays the VAT because he’s the end consumer. He’s not buying the TV to sell, or for his business, in which case the rules might be different.
If John has a plumber fix his sink, the plumber may add VAT to his invoice, too. This is because John is consuming his services, and the plumber is a VAT-registered business.
The retailer and plumber collect the VAT John pays and then pass it to the government on a monthly, quarterly or (less commonly) yearly basis.
As the end consumer, John is never required to pay the VAT himself to the government. Because of this, VAT is referred to as an indirect tax. In other countries, taxes similar to VAT are sometimes referred to as a general sales tax (GST), or just a sales tax.
How do I calculate VAT for goods or services?
There are several VAT rates (see below), but the most commonly applied to goods and services is the standard rate of 20%.
Calculating VAT is pretty easy, and a simple method is as follows:
- 20% Standard Rate: Take the ex-VAT price of the goods or service and then multiply it by 1.2. For example, if a television costs £100, then we multiply this by 1.2, which gives us £120.
- 5% Reduced Rate: Take the ex-VAT price of the goods or service, and then multiply it by 1.05. For example, if a children’s car seat costs £10, then we multiply this by 1.05, which gives us £10.50.
- Zero Rate: No sums needed! The price is the same with or without VAT applied.
How do I calculate a price with the VAT deducted?
If you’re a VAT-registered business, you might see goods or services listed inclusive of VAT, but want to know what the price is without VAT (because you won’t be paying that VAT).
This is a simple calculation.
- 20% Standard Rate: Just take the VAT-inclusive price, and divide it by 1.2. For example, if a drill is advertised at £59, with VAT included, divide the price by 1.2. Thus, we see that the ex-VAT cost is £49.17.
- 5% Reduced Rate: Take the VAT-inclusive price, and divide it by 1.05. For example, if an electric storage heater is advertised at £120 with VAT included, divide the price by 1.05. That tells us that the ex-VAT cost is £114.29.
- Zero Rate: The price is the same with or without VAT applied.
How do I calculate the ex-VAT price from the VAT amount?
Sometimes you might only be provided with the VAT-inclusive price and the VAT amount. If so, you can work out the ex-VAT price in the following way:
- 20% Standard Rate: Take the VAT amount and multiply it by 5. For example, if the VAT for the purchase of a men’s shirt is listed as £4, then the total ex-VAT price will be £20.
- 5% Reduced Rate: Take the VAT amount and multiply it by 20. For example, if the VAT on a hot sandwich eaten in a café is listed as 10p, then this means the ex-VAT price is £2.00.
Do I have to charge VAT?
Only businesses or individuals that are registered for VAT must charge it.
Usually, registration is required when the business turnover has exceeded the threshold. This is currently £85,000 per year but is often adjusted upwards in the budget.
But it’s possible for individuals or businesses to voluntarily register for VAT if their turnover is less than £85,000. This is done often because the business deals with other VAT-registered businesses and it makes life simpler for everybody. Or sometimes businesses do it to give the appearance of being more established and professional.
Do individuals have to charge VAT?
Both incorporated businesses and individuals can register for VAT. If an individual is selling you something through a retail business they run, or a tradesperson is providing a service, then they should charge VAT if they’re VAT-registered.
However, there’s usually no need to charge VAT if you’re simply selling something in an ad-hoc way, such as if you’re selling unwanted clothes on eBay, or if you’re selling your own car to somebody. It’s only if you were doing so professionally, or if your turnover reached the VAT-registration threshold of £85,000 over the last 12 months, that this might change.
Are goods or services ever VAT-free?
You may see some businesses advertising that they’re selling goods free of VAT.
It’s true that some items are zero-rated for VAT, or are out of scope for VAT so that no VAT is charged. But this usually isn’t what these businesses mean.
Typically, adverts that say goods are being sold “VAT free” are merely a marketing promotion that means the business is reducing the price by a set amount, supposedly comprising the 20% typically added by VAT (and unless you know the ex-VAT retail price beforehand, there’s no way of knowing if this is true).
Sometimes the government will temporarily reduce the rate of VAT on certain goods to boost trade. For example, during the pandemic, the UK government temporarily reduced the VAT rate applied by hospitality businesses, such as cafes and hotels.
Whether you get charged VAT on services (e.g. by tradespeople like plumbers or builders) will depend on whether they’re VAT-registered. Ask them when seeking your quotation.
If a business is in the process of applying for VAT registration they might charge you VAT. Whether you pay at that point is up to you. You might ask them to issue a fresh invoice once they’re VAT registered with the VAT amount added, and pay it then.
How do I calculate my VAT bill?
Here are the steps required, in general terms:
- End consumer: If you’re buying goods or services to which VAT is applied, and you’re not VAT registered, you might want to know how much VAT you've been charged. To do so, look at the receipt or invoice—this typically lists the VAT amount. If it doesn't, you can usually specifically request a VAT invoice or receipt that does so. If this isn’t available, then you’ll need to manually discover what items VAT applies to within the order, and the VAT rates, and any special circumstances that might affect if VAT is applied. This can be difficult to do for anybody not versed in the tax system, which is why it’s better if the seller or provider provides this info.
- Businesses: If you’re a VAT-registered business then the total amount of VAT you pay HMRC in a given period is calculated by deducting the amount of VAT you’ve paid for things like supplies from the amount of VAT you’ve collected from sales of goods and services. The VAT you’ve been charged is known as input VAT, while the VAT you charge is known as output VAT, so another way of describing the calculation is to say that output VAT minus input VAT equals the amount of VAT the business should pay HMRC. The software you use for your VAT accounting will work this out for you, provided it’s up to date with the correct input and output VAT data!
What’s a VAT invoice?
HMRC requires those registered for VAT to issue special kinds of invoices, known as VAT invoices. These are similar to standard invoices but must also include some additional details, such as the VAT tax point, your VAT registration number, the VAT rate applied, the total amount of VAT, and so forth.
What’s a VAT receipt?
To be able to claim VAT on purchases, which is a vital part of VAT accounting, businesses often demand a more detailed receipt when purchases are made.
Often referred to as a VAT receipt (although this has no legal definition), the receipt details the VAT amount alongside the full amount, the VAT percentage, the VAT registration number of the seller, the tax point/date of the purchase, and often other details like the address of the business.
What is VAT charged on?
This is a difficult question to answer! VAT can be charged on many goods and services, but a labyrinthine set of rules and regulations have evolved that can cause even experts to pause for thought.
For example, there are infamous cases around whether snack foods should have VAT applied. Cakes or flapjacks bought to be eaten at home do not generally have VAT applied. But what if you create a new snack bar that’s like a flapjack but is slightly different? Does that have VAT applied? This is an important issue because VAT increases the price by 20%. It’s because of this that judges have had to consider what legally defines a flapjack.
Making things more complicated is the fact that a number of conditions can affect if VAT is applied, such as how it is sold, and by whom, and where the item will be consumed. For example, have you ever noticed how you’re asked in cafes or restaurants if the food you’re ordering is take away, or eat-in? This is because it affects whether VAT is charged or not.
The government explains more here and you can look up whether goods should have VAT applied (or not) here. But it’s wise to consult a tax expert if you’re in any doubt. Once you know the rules for the particular goods or services you sell then it’s pretty straightforward.
What is the VAT rate?
There are three VAT rates. The most commonly applied is the standard rate, and this is undoubtedly what most people refer to when they talk about the VAT rate.
Here are the rates:
- Standard Rate: 20%
- Reduced Rate: 5%
- Zero Rate: 0%
There’s also a fourth category referred to as VAT exemption. As you might guess, this is where goods or services have no VAT applied because VAT doesn’t apply to them. But this is not the same as the zero rate. If your business sells goods or services that are zero-rated then, even if no VAT is charged, they must still be recorded in your VAT accounting. Furthermore, the sale of zero-rated goods and services can still count towards the VAT registration threshold.
Do I have to list prices including VAT?
In general terms, if you’re selling to consumers then you’ve a legal requirement to list prices including VAT, or any other taxes that might apply. This includes prices shown in advertising like catalogues.
If you’re selling to businesses then prices do not need to be listed including VAT (again, in general terms).
For example, a supermarket must list prices including VAT, but a wholesaler selling the same goods does not need to. However, many wholesalers will list the VAT-inclusive price in smaller print alongside the ex-VAT price. Similarly, some retailers targeting both consumers and businesses will list the ex-VAT price in smaller print.
The above requirements are enforced by two areas of trading standards legislation: the Price Marking Order 2004, and the Consumer Protection from Unfair Trading Regulations 2008. These apply to England, Scotland and Wales. For more details, see the government-authorised Business Companion website.
Note that Northern Ireland has its own rules in line with the post-Brexit agreements.
The Advertising Standards Authority (ASA) and the Committee of Advertising Practice (CAP) have good practice rules around the list of prices in advertising and marketing materials, including online. These suggest prices should be listed including VAT if consumers are the target audience. The ASA/CAP can take action if these rules are breached. For more details see the ASA/CAP website.
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