Understanding Value Added Tax (VAT)

Value Added Tax, or VAT, is a type of consumption tax that is placed on a product or service whenever value is added at each stage of the supply chain, from production to the point of sale. It is common in many parts of the world, particularly in the European Union. Although the end consumer ultimately pays the tax, the mechanism allows businesses to collect and pay the tax to the government at various stages.

This calculator simplifies the process of working with VAT. It allows you to either add VAT to a net price to find the gross price, or to extract the VAT from a gross price to find the original net amount. This is an essential tool for businesses for correct invoicing and for consumers to understand the final cost of goods and services.

The VAT Formulas

The calculations for adding or removing VAT are straightforward.

• Adding VAT (to find the gross price from a net price):
  Gross Price = Net Price × (1 + VAT Rate / 100)
• Extracting VAT (to find the net price from a gross price):
  Net Price = Gross Price / (1 + VAT Rate / 100)
VAT Amount = Gross Price - Net Price

Frequently Asked Questions (FAQ)

• What is the difference between VAT and Sales Tax?VAT is collected at every stage of the supply chain where value is added, and businesses can often claim back the VAT they have paid on their own purchases. A sales tax is typically only collected at the final point of sale to the consumer. The final price to the consumer might be similar, but the mechanism is different.
• How do I calculate a 20% VAT?To add 20% VAT to a price, you multiply the net price by 1.20. For example, if the net price is £100, the gross price is £100 × 1.20 = £120. To extract 20% VAT from a gross price, you divide by 1.20. For example, if the gross price is £120, the net price is £120 / 1.20 = £100.