If you have registered your business for VAT and are selling products or services that are taxable for VAT, it is important to be able to calculate VAT. This will help you ensure your own financial affairs are in order, while it’ll also enable you to provide accurate VAT figures to customers who may need a VAT receipt for their own tax affairs. You’ll also need to use VAT calculations in your own tax returns, although almost all business services will include a breakdown of the VAT on any invoices for products or services supplied.
In the event that you advertise your prices inclusive of VAT, or in the unlikely event you’ll find yourself unable to acquire a VAT invoice, you’ll need to know how to deduct the VAT from the total price.
Doing the Maths
The current standard VAT rate is 20%, and you can use two methods to calculate VAT.
The first is to find out the price of the item independent of VAT. To do this, you simply divide the cost by 1.2. For example, if something cost £150, dividing it by 1.2 gives you the VAT-exclusive price of £125. You can then deduct £125 from £150 to work out the VAT on this purchase was £25.
The second way is the more simple, as you use a VAT fraction (which is 1/6), to calculate the VAT. For example, if you used the same numbers as above, you’d simply divide £150 by 6, which would instantly give you the answer of £25 VAT.