Calculate value-added tax and net/gross prices
Value Added Tax (VAT) is a consumption tax placed on products at each stage of production where value is added. Unlike sales tax collected only at final sale, VAT is collected throughout the supply chain. Understanding VAT calculations is essential for businesses and consumers in countries using this system.
Price with VAT = Net Price × (1 + VAT Rate / 100)
| Calculation | Expression | Result |
|---|---|---|
| Add 20% VAT | $100 + 20% VAT | $120.00 |
| Remove 20% VAT | $120 excl. VAT | $100.00 |
| VAT amount | VAT on $100 at 20% | $20.00 |
VAT-inclusive (gross) price includes the tax in the displayed amount. VAT-exclusive (net) price shows the price before tax is added. In many countries, consumer prices must be shown VAT-inclusive, while business-to-business prices are often VAT-exclusive.
To find VAT from a gross price: VAT = Gross Price - (Gross Price / (1 + VAT Rate)). For example, with 20% VAT: £120 gross price contains £20 VAT (£120 - £120/1.20 = £120 - £100 = £20).
Reverse charge shifts VAT payment responsibility from seller to buyer. It's used in specific situations like cross-border EU transactions or certain industries. The buyer accounts for VAT in their return rather than paying it to the seller.
Most countries have multiple VAT rates: Standard rate for most goods, reduced rates for essentials (food, medicine, books), zero rate for exports and specific items, and exempt items (healthcare, education). Rates and categories vary by country.
VAT is collected at each production stage, with businesses reclaiming VAT on inputs. Sales tax is collected only at final sale to consumers. VAT is self-policing (each business has incentive to get invoices), while sales tax relies on the final seller to collect.
VAT-registered businesses can reclaim VAT paid on business purchases (input VAT) against VAT collected from sales (output VAT). They pay only the difference to tax authorities. This is why VAT doesn't cascade through the supply chain.