Whether you’re buying or selling, when it comes to filling in your returns you may need to work out VAT backwards on items sold VAT-inclusive. In this article, I explain exactly how VAT is calculated and give examples to help you further.
Different rules apply for business registered under certain VAT accounting schemes, such as the second-hand scheme.
Table of contents
1. How is VAT Calculated
VAT is added to the net price of a service or product, at the applicable rate. For the purpose of this blog, I’ll assume that is 20% even though other rates exist.
So, if you sell a product for £100, you add 20% for VAT and charge the total. In other words, £100 + £20 = £120 or £100 x 1.2. This is how I think about it visually:
2. How to Calculate VAT Backwards
To remove VAT from a VAT-inclusive figure you’ll need work the figure out in reverse. Let’s say I have paid £100 for a product, including VAT.
To work out how much VAT I have paid, I do the calculation £100 x 20/120 = £16.67. The amount I have paid is the gross figure of 120% (look at the table above) and I want 20%.
Here’s another example of how to work out VAT backwards: I paid £240 for a product so that means I’ve paid VAT of £40 or £240 x 20/120.
3. How to Remove VAT to Find the Net Price of a VAT Inclusive Number
Using the same principle, I can also work out the net amount I have paid on a VAT-inclusive price. On the product I paid £240 for that would be £200 calculated as £240 x 100/120.