How to calculate VAT: adding and removing it correctly

VAT (value added tax) and similar taxes such as GST are charged as a percentage of a price. Working it out takes one of two formulas, depending on whether your starting price includes the tax or not.

Net, gross and VAT

• Net price — the amount before VAT.
• VAT amount — the tax itself.
• Gross price — net plus VAT; what the customer pays.

Adding VAT to a net price

VAT   = net × (rate ÷ 100)
gross = net × (1 + rate ÷ 100)

Example at 20%: a net price of 250 gives VAT of 250 × 0.2 = 50, and a gross price of 250 × 1.2 = 300.

Removing VAT from a gross price

net = gross ÷ (1 + rate ÷ 100)
VAT = gross − net

Example at 20%: a gross price of 300 gives a net price of 300 ÷ 1.2 = 250, so the VAT included is 50.

The common mistake

It’s tempting to remove 20% VAT by taking 20% off the gross price. That gives 300 − 60 = 240, which is wrong. The VAT was calculated on the net price, so you have to divide by 1.2 rather than subtract 20%. The percentage calculator explains why percentage changes don’t simply reverse.

Rounding

Tax is normally rounded to the smallest currency unit. Whether you round each line on an invoice or only the invoice total can make a difference of a cent or penny, and tax authorities often have rules about which method to use. Pick the method your local guidance allows and apply it consistently.

Rates vary

Rates differ between countries and between types of goods and services, and they change over time. Always check the current rate with your tax authority — this guide explains the arithmetic, not which rate applies to you.

Skip the maths

The VAT calculator adds or removes VAT at any rate and shows the net, VAT and gross figures side by side. If you’re billing a client, the invoice generator applies tax to your invoice total automatically.