How to calculate VAT: add or remove 20% VAT, with the sums

How do you add VAT to a price?

To add VAT to a price, multiply the price before VAT by 1.2 for the 20% standard rate or by 1.05 for the 5% reduced rate. A £250 invoice before VAT becomes £300 with 20% VAT, because £250 × 1.2 = £300. The VAT itself is £250 × 20% = £50.

The price before VAT is called the net price and the price including VAT is the gross price. According to GOV.UK, the standard rate of 20% applies to most goods and services, and it has been 20% since 4 January 2011, when it rose from 17.5%.

For any rate, the multiplier is 1 plus the rate as a decimal. A 12.5% rate gives 1.125, so £80 becomes £90.

How do you remove VAT from a price (reverse VAT)?

To remove 20% VAT from a price that already includes it, divide by 1.2; to remove 5% VAT, divide by 1.05. A £300 price including 20% VAT is £250 before VAT, and the VAT inside it is £50. This is what people call reverse VAT or VAT removal.

You get the same VAT figure by dividing the gross price by 6, because VAT at 20% is one-sixth of a VAT-inclusive price: £300 ÷ 6 = £50. Take that off the gross price to get the net price: £300 - £50 = £250.

Prices that do not divide neatly need rounding. A £49.99 price including 20% VAT contains £49.99 ÷ 6 = £8.3317 of VAT, which rounds to £8.33, so the net price is £41.66. As a check, £41.66 × 1.2 = £49.992, which rounds back to £49.99.

The VAT calculator does this in one step: switch to Remove VAT, enter the gross price and it shows the net price, the VAT and the working.

The VAT fraction: why VAT at 20% is one-sixth of the gross price

The VAT fraction is the share of a VAT-inclusive price that is VAT, and you work it out as the rate divided by 100 plus the rate. According to VAT Notice 700, paragraph 7.3.1, VAT at 20% gives 20/120, which is one-sixth, and VAT at 5% gives 5/105, which is one twenty-first.

HMRC uses the example of an item sold for £2.40 including 20% VAT. The VAT is 40p, which is one-sixth of £2.40, not 20% of it. The 20% applies to the net price of £2.00, and £2.00 + 40p = £2.40.

The fraction matters because the obvious shortcut is wrong. Taking 20% off £120 gives £96, but the real net price is £100. The VAT fraction always gives the right answer, whatever the rate.

How to work out VAT on a calculator, key by key

To work out VAT on an ordinary calculator, use multiplication and division only: type the net price, then × 1.2 = to add 20% VAT, or type the gross price, then ÷ 1.2 = to remove it. These keystrokes work on every calculator, including the one on your phone.

Some calculators have a % key that adds a percentage when you press + first, but the result depends on the model. If you are not sure how yours works, use the multipliers above, then round the answer to the nearest penny.

Which VAT rate applies: 20%, 5%, 0% or exempt

The UK has 3 VAT rates: the standard rate of 20%, the reduced rate of 5% and the zero rate of 0%. According to GOV.UK, the standard rate covers most goods and services, the reduced rate covers some things such as children's car seats and home energy, and the zero rate covers things such as most food and children's clothes.

Zero-rated and exempt are not the same. According to VAT Notice 700, paragraphs 3.5 and 3.6, zero-rated sales are taxable supplies at 0%, so they count towards your VAT turnover and you can still recover VAT on related business costs, while a business making exempt supplies cannot normally recover the VAT on its expenses. Exempt sales, such as postage stamps and financial and property transactions, do not count towards the registration threshold.

Which rate applies to a product is set by law, not by the seller. GOV.UK publishes a list of rates for different goods and services; check it before you invoice anything that is not plainly standard-rated.

How HMRC lets you round VAT on invoices

HMRC lets you round the total VAT on an invoice down to a whole penny, ignoring any fraction of a penny. This concession is in VAT Notice 700, paragraph 17.5 (older editions numbered it section 16), and it is meant for businesses that invoice other businesses, where the VAT charged and the VAT paid to HMRC are the same.

If you work out VAT line by line, paragraph 17.5.1 allows 2 ways to round each line, and you must use one of them consistently:

• down to the nearest 0.1p, so 86.76p becomes 86.7p
• to the nearest 1p or 0.5p, so 86.76p becomes 87p

After rounding each line, you may round the final VAT total down to the nearest whole penny. Retailers are treated differently: under paragraph 17.6, a retailer who works out VAT per line or per invoice must not round the VAT down, but may round each calculation up or down.

The choice can change the total. Take an invoice with 3 items at 99p each before VAT. Each line has 19.8p of VAT. Rounded to the nearest penny per line, that is 20p × 3 = 60p. Worked out on the invoice total instead, it is £2.97 × 20% = 59.4p, rounded to 59p. The VAT calculator shows the total under every method HMRC allows, so you can pick one and stick with it.

Worked example: an invoice with lines at 20%, 5% and 0%

On an invoice with more than one VAT rate, you work out VAT for each line at its own rate and show a VAT total in sterling. According to VAT Notice 700, paragraph 16.3.1, a full VAT invoice shows, for each line, the quantity, the rate of VAT and the amount excluding VAT, plus the total amount of VAT.

A VAT summary per rate makes the invoice easy to check and to enter in your records: £700.00 net and £140.00 VAT at 20%, £120.00 net and £6.00 VAT at 5%, and £38.97 at 0%. The Invoice lines tab in the VAT calculator builds this summary for up to 50 lines and copies it in one click.

For sales of £250 or less including VAT, you can give a simplified VAT invoice if your customer agrees, according to VAT Notice 700, paragraph 16.6.1. It shows the total including VAT and the VAT rate for each rate, rather than every net figure.

When you have to register for VAT: the £90,000 rolling test

You must register for VAT if your taxable turnover for the last 12 months goes over £90,000, or if you expect it to go over £90,000 in the next 30 days alone. The threshold rose from £85,000 to £90,000 from 1 April 2024, and the deregistration threshold rose from £83,000 to £88,000 at the same time, according to GOV.UK.

The 12 months are a rolling period, not your tax year or accounting year. At the end of each month, add up your taxable turnover for that month and the 11 before it. Taxable turnover includes standard, reduced and zero-rated sales, but not exempt or out of scope sales.

According to GOV.UK, you have to register within 30 days of the end of the month in which you went over, and your registration takes effect from the first day of the second month after. For example, if your sales are £7,600 a month, your rolling total reaches £91,200. If it first goes over £90,000 in July 2026, you must register by 30 August 2026 and charge VAT from 1 September 2026.

The Registration threshold tab in the VAT calculator adds up 12 months of figures, shows how far you are from £90,000 and gives your deadline and effective date if you are over.

How the Flat Rate Scheme changes the VAT you pay

Under the VAT Flat Rate Scheme you pay HMRC a fixed percentage of your VAT-inclusive turnover instead of the difference between VAT on sales and VAT on purchases. According to GOV.UK, you can join if you expect VAT taxable turnover of £150,000 or less excluding VAT in the next 12 months, and you get 1% off your rate in your first year of VAT registration.

You still charge customers the normal rate of VAT. GOV.UK gives this example: a photographer bills £1,000 plus 20% VAT, making £1,200. The flat rate for photography is 11%, so the photographer pays HMRC 11% of £1,200, which is £132, and keeps the other £68 of VAT charged.

The scheme often costs more for businesses that buy few goods. According to VAT Notice 733, you are a limited cost business, and must use a flat rate of 16.5%, if your spending on relevant goods including VAT is less than 2% of your flat rate turnover, or more than 2% but less than £1,000 a year (£250 a quarter). Services, vehicle costs and fuel (unless you are in transport), food and drink for staff and capital goods do not count as relevant goods.

An IT consultant who invoices £15,000 a quarter plus VAT has flat rate turnover of £18,000. With £300 of relevant goods, under the 2% figure of £360, the rate is 16.5%, so the scheme costs £2,970. Under normal accounting, with £150 of VAT to reclaim on purchases, the bill is £3,000 - £150 = £2,850, which is £120 less. The Flat Rate Scheme tab in the VAT calculator runs this comparison for each business type.

Common VAT calculation mistakes and how to avoid them

The most common VAT mistake is taking 20% off a price that already includes VAT. On £300, that gives £240, which understates the net price by £10; the right answer is £300 ÷ 1.2 = £250.

• Using 20% instead of 1/6 for VAT inside a price. 20% of £300 is £60, but the VAT inside £300 is £50.
• Rounding inconsistently. HMRC lets you choose a rounding method, but you must use the same one on every invoice.
• Rounding down as a retailer. The round-down concession is for invoice traders; retailers who work out VAT per line or invoice must not round down.
• Counting exempt sales towards the threshold. Zero-rated sales count towards the £90,000 test; exempt and out of scope sales do not.
• Checking turnover once a year. The registration test is a rolling 12 months, so check it at the end of every month once you are close.
• Joining the Flat Rate Scheme without the 2% test. If you spend little on goods, the 16.5% rate can leave you paying more than under normal VAT accounting.