What VAT is
VAT, or Value Added Tax, is a tax added to many goods and services in the UK. VAT-registered businesses charge VAT on taxable sales and may reclaim VAT on eligible business purchases. For consumers, VAT is often hidden inside the price. For businesses, VAT has to be tracked carefully because the VAT element is not the same as profit.
The standard UK VAT rate is commonly used in examples, but some goods and services are reduced-rated, zero-rated, exempt, or outside the scope of VAT. The calculation method depends on whether the starting price includes VAT or excludes VAT.
VAT-inclusive vs VAT-exclusive prices
| Price type | Meaning | Example use |
|---|---|---|
| VAT-exclusive | Price before VAT is added | Business quote before VAT |
| VAT-inclusive | Price already includes VAT | Retail price paid by a consumer |
| VAT amount | The tax element inside or added to the price | VAT box on an invoice |
How to add VAT
To add VAT to a VAT-exclusive price, multiply the price by 1 plus the VAT rate. At 20%, multiply by 1.20. The VAT amount itself is the net price multiplied by 20%.
Standard VAT rate example
A business sells a service for GBP 100 plus VAT. At 20% VAT, the VAT amount is GBP 20 and the customer pays GBP 120 in total.
- VAT = GBP 100 x 20% = GBP 20
- Gross price = GBP 100 + GBP 20 = GBP 120
The VAT-inclusive price is GBP 120.
How to remove VAT
To remove VAT from a VAT-inclusive price, divide by 1 plus the VAT rate. At 20%, divide by 1.20. This gives the net price. The VAT amount is the gross price minus the net price.
A common mistake is subtracting 20% from a VAT-inclusive price. That is not correct because VAT is 20% of the net price, not 20% of the gross price.
Removing VAT example
A VAT-inclusive price is GBP 120. To find the price before VAT at 20%, divide by 1.20.
- Net price = GBP 120 / 1.20 = GBP 100
- VAT amount = GBP 120 - GBP 100 = GBP 20
The price before VAT is GBP 100 and the VAT element is GBP 20.
VAT scenarios
| Scenario | Correct approach | Common trap |
|---|---|---|
| Retail price already includes VAT | Divide by 1.20 to find the net price at 20% | Subtracting 20% from the gross price |
| Business quote is plus VAT | Multiply net price by 1.20 | Forgetting the customer pays more than the quote line |
| Discount applied before VAT | Apply discount to net price, then add VAT | Calculating VAT before the discount when invoice terms say otherwise |
| Mixed VAT rates | Calculate each line separately | Using one rate across the whole invoice |
| Margin planning | Remove VAT before calculating profit margin | Treating VAT collected as revenue kept by the business |
Scenario example: pricing a VAT-registered product
A shop wants to keep GBP 48 net revenue from a product after VAT. The standard VAT rate is 20%. The shelf price needs to include VAT because the customer sees the final consumer price.
- Net selling price needed: GBP 48
- VAT at 20%: GBP 48 x 0.20 = GBP 9.60
- VAT-inclusive shelf price: GBP 48 + GBP 9.60 = GBP 57.60
If the shop prices the product at GBP 48 including VAT, the net revenue is only GBP 40. VAT-inclusive pricing must be built from the required net price.
Common mistakes
- Subtracting 20% from a VAT-inclusive price instead of dividing by 1.20.
- Treating VAT collected as business profit.
- Using the standard rate when a reduced or zero rate applies.
- Forgetting that VAT registration changes invoice and record keeping requirements.
- Comparing supplier prices without checking whether VAT is included.
FAQ
How do I add 20% VAT?
Multiply the VAT-exclusive price by 1.20.
How do I remove 20% VAT?
Divide the VAT-inclusive price by 1.20.
Is VAT the same as profit?
No. VAT collected from customers is normally owed to HMRC after eligible input VAT is accounted for.
Do all UK sales have 20% VAT?
No. Some sales are reduced-rated, zero-rated, exempt, or outside the scope.
Should quotes include VAT?
That depends on the customer and context. Consumer-facing prices usually need clear VAT-inclusive pricing.
Tax rules can change. Check current HMRC guidance or speak to a qualified adviser.