VAT Explained
VAT (value added tax), also called sales tax or GST in some countries, is a tax added to the price of most goods and services. The rate varies by country, so this guide sticks to how VAT behaves rather than any one rate. Whatever your local rate, the maths is the same.
How does VAT actually work?
VAT is charged at each stage of the supply chain, but businesses reclaim the VAT they pay on their own purchases, so each one only hands over tax on the value they add. A maker pays VAT on materials, charges VAT when they sell to a shop, and pays the tax office the difference. The shop does the same when it sells to you. The result is that the whole chain nets out to VAT on the final price, and it is the end customer who actually bears the cost. That is why the number that matters to you is simply the VAT on the shelf price.
Inclusive vs exclusive prices
A price is exclusive of VAT (net) when the tax has not been added yet, and inclusive (gross) when it has. Businesses usually think in net prices; the shelf price you pay is the gross price. The difference between the two is the VAT itself.
How to add VAT
Multiply the net price by (1 + rate as a decimal). At a 14% rate, a net price of 100 becomes 100 x 1.14 = 114, with 14 of VAT. At 20% it would be 100 x 1.20 = 120, with 20 of VAT. The rate is the only thing that changes; the method does not.
How to remove VAT
Divide the gross price by that same figure. A gross price of 114 at 14% becomes 114 / 1.14 = 100 net, so the VAT portion is 14. At 20%, a gross of 120 becomes 120 / 1.20 = 100 net.
How to find the VAT amount in a price
If you just want the tax hidden inside a gross price, multiply the gross by rate / (100 + rate). At 20%, the VAT inside a 120 price is 120 x 20 / 120 = 20. This is handy for expense claims and invoices, where you need to show the VAT portion separately from the net.
The mistake almost everyone makes
You cannot remove VAT by subtracting the percentage. Taking 14% off 114 gives 98.04, not 100, because the 14% was originally calculated on the smaller net figure, not the gross. To reverse VAT correctly, always divide, do not subtract. Our VAT Calculator does both directions for any rate.
VAT and discounts together
Apply the discount first, then work out VAT on the reduced price. A discount changes the net amount, and VAT follows whatever the net becomes. The Discount Calculator handles the first step.
Do all businesses charge VAT?
Not always. Most countries set a registration threshold, a level of annual turnover below which a small business does not have to register for or charge VAT. Some goods are also zero-rated or exempt, such as certain foods, books or medical supplies, depending on the country. Because thresholds and exemptions vary so widely, check your own tax authority for the rules that apply to you.
Frequently asked questions
How do I remove VAT from a price?
Divide the gross price by (1 + rate/100). At 14%, a gross of 114 becomes 100 net; at 20%, a gross of 120 becomes 100 net. Do not just subtract the percentage.
How do I find the VAT amount inside a price?
Multiply the gross price by rate / (100 + rate). At 20%, the VAT inside 120 is 120 x 20 / 120 = 20, leaving 100 net.
What is the difference between net and gross?
Net is the price before VAT; gross is the price after VAT is added. The difference between them is the VAT itself.
Is VAT the same everywhere?
No. Rates vary by country, some goods are zero-rated or exempt, and small businesses below a turnover threshold may not charge it. Enter the rate that applies to you and check your local rules.