How VAT is calculated in the UK

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To add UK VAT, multiply a VAT-exclusive price by 1.2 at the 20 per cent standard rate or 1.05 at the 5 per cent reduced rate. To remove VAT, divide the VAT-inclusive price by the same multiplier, then subtract the result from the inclusive price to find the VAT.

Situation	Calculation	Result
Add 20 per cent VAT	Net price × 1.2	VAT-inclusive price
Add 5 per cent VAT	Net price × 1.05	VAT-inclusive price
Remove 20 per cent VAT	Gross price ÷ 1.2	Price before VAT
Remove 5 per cent VAT	Gross price ÷ 1.05	Price before VAT
Find 20 per cent VAT within a gross price	Gross price × 1/6	VAT amount
Find 5 per cent VAT within a gross price	Gross price × 1/21	VAT amount
VAT due for a period	Output tax − input tax	Payment or repayment
Flat Rate Scheme payment	Flat rate percentage × VAT-inclusive turnover	Amount paid to HMRC

Adding VAT to a price

VAT is calculated by multiplying the taxable value by the applicable rate. The UK has standard, reduced and zero VAT rates, while exempt supplies carry no VAT.

The standard rate is 20 per cent and applies to most goods and services. The reduced rate is 5 per cent for some supplies, including children’s car seats and home energy, while zero-rated supplies include most food and children’s clothes.

For a price before VAT, calculate the VAT separately by multiplying the net amount by 0.2 or 0.05. You can then add that VAT to the net amount, or use the multiplier directly.

For example, a £250 service at 20 per cent VAT works as follows. £250 × 0.2 = £50 VAT, and £250 + £50 = £300 including VAT.

The same result comes from £250 × 1.2 = £300. For a £250 item at 5 per cent, £250 × 1.05 = £262.50.

Zero-rated sales are still entered as sales and charged at 0 per cent. Exempt supplies are different because they do not carry VAT.

Taking VAT out of an inclusive price

Do not take 20 per cent off a VAT-inclusive price to find its net value. A price that already includes VAT contains tax calculated from the lower, VAT-exclusive amount.

At 20 per cent, divide the gross price by 1.2. At 5 per cent, divide it by 1.05.

For example, take a £360 VAT-inclusive price at the standard rate. £360 ÷ 1.2 = £300 before VAT, then £360 − £300 = £60 VAT.

The VAT fraction gives the same answer. The fraction is the VAT rate divided by 100 plus that rate, so the standard-rate fraction is 20/120, or one-sixth.

One-sixth of £360 is £60. At the reduced rate, the VAT fraction is one twenty-first, so a £210 gross price contains £10 VAT and £200 before VAT.

HM Revenue and Customs gives a simple standard-rate example: £2.40 includes 40p VAT. The VAT is one-sixth of £2.40, rather than 20 per cent of £2.40.

Using different VAT rates on one invoice

For every listed supply, a full VAT invoice must state its rate and its value before VAT. It must also show the seller’s VAT number and state VAT as a separate amount.

Work out each line at its own rate, then add the VAT amounts together.

For example, an invoice has a £100 standard-rate line, a £60 reduced-rate line and a £40 zero-rated line. The standard-rate VAT is £100 × 0.2 = £20.

The reduced-rate VAT is £60 × 0.05 = £3. The zero-rated VAT is £40 × 0 = £0.

Total net value is £100 + £60 + £40 = £200. Total VAT is £20 + £3 + £0 = £23, making the invoice total £223.

Invoice traders can discard a fraction of a penny by rounding the invoice’s combined VAT figure down to the nearest penny. HMRC permits that treatment only when the VAT billed to customers is the same VAT paid to it.

Retailers calculating VAT per line or per invoice cannot use that round-down approach. They may round each calculation up or down.

What a business pays HMRC

Output tax means VAT arising on the taxable supplies a business makes. Input tax is the VAT charged on its purchases and expenses.

On the VAT Return, input tax is deducted from output tax. Where purchase VAT is greater than output tax, HMRC repays the excess.

For more detail, see which VAT on business costs a UK business can reclaim.

For example, a business has £900 output tax and £650 input tax. £900 − £650 = £250, so £250 is due.

If output tax is £400 and input tax is £550, £400 − £550 = minus £150. The business reclaims £150.

VAT charged on business entertainment expenses is normally not recoverable. A VAT Return is usually due every three months, which is the accounting period.

A business must register before it starts charging VAT. Registration is compulsory where taxable turnover for the past 12 months exceeds £90,000, or where taxable turnover is expected to exceed £90,000 in the next 30 days.

For more on registration, see the UK VAT registration threshold and registration process. Businesses also need to apply any VAT rate change from the date it takes effect.

How the Flat Rate Scheme changes the calculation

The VAT Flat Rate Scheme uses a different payment calculation. Instead of deducting purchase VAT from sales VAT in the normal way, the business pays its assigned percentage of VAT-inclusive turnover.

A business with VAT turnover of £150,000 or less, excluding VAT, may be able to join the scheme. It must apply to HMRC to join.

With that scheme, purchase VAT is generally unavailable as a reclaim; certain capital assets over £2,000 are the exception.

For example, a £1,000 bill at 20 per cent VAT totals £1,200. A business with an 11 per cent flat rate calculates £1,200 × 0.11 = £132 payable to HMRC.

The flat rate for accountancy or book-keeping is 14.5 per cent. Computer and IT consultancy, plus data processing, have a 14.5 per cent flat rate.

A limited cost business pays 16.5 per cent. It is a business whose goods cost less than 2 per cent of turnover, or less than £1,000 a year where goods costs exceed 2 per cent.

A business in its first VAT-registered year receives a 1 per cent reduction in its flat rate.

Common questions

Is zero-rated VAT the same as exempt?

No. Zero-rated sales are accounted for at 0 per cent, while exempt supplies carry no VAT.

Can I calculate VAT by subtracting 20 per cent from a gross price?

No. At the standard rate, VAT is one-sixth of the VAT-inclusive price. Divide the gross figure by 1.2 to find the amount before VAT.

What happens if I pay VAT late?

HMRC charges late-payment interest from the first overdue day until full payment.

Can a Flat Rate Scheme user reclaim purchase VAT?

Usually no. The exception is certain capital assets costing more than £2,000.

Sources

• GOV.UK: VAT guide (VAT Notice 700)
• GOV.UK: Charge, reclaim and record VAT: Charging VAT
• GOV.UK: VAT rates
• GOV.UK: VAT Flat Rate Scheme : Overview
• GOV.UK: VAT Flat Rate Scheme : Work out your flat rate
• GOV.UK: Sending a VAT Return: When to do a VAT Return
• GOV.UK: Register for VAT: When to register for VAT
• GOV.UK: Late payment interest if you do not pay VAT or penalties on time