If you’re a VAT registered business or trader, and you provide a product or service that is taxable for VAT, then you need to be able to calculate VAT yourself. Whether you advertise your services exclusive of VAT, or advertise them inclusive and need to work out the VAT later, knowing how to break it down will ensure you can keep your finances in check at all times, as well as provide customers with a breakdown of VAT should they need it.
If you want to claim back VAT, you might find that you are unable to obtain a VAT receipt for certain purchases, which is another example of when you’ll need to be able to work it out yourself. Here is how you can easily calculate the VAT on your purchases or sales, whether you need to add it onto VAT exclusive prices or extract it from VAT inclusive ones.
Calculating VAT: Standard Rate
If a price doesn’t include VAT, then you need to add on the 20% standard VAT rate in order to get the true price.
Doing this is simple. All you have to do is take the price, and multiply it by 1.2. For example, if something costs £1,000 exclusive of VAT, your calculation of £1,000 x 1.2 tells you that the total price is £1,200, and £200 of that is VAT.
To extract the VAT from a VAT inclusive figure, you do the opposite, and divide the number. In this instance, you’d divide £1,200 by 1.2, and you end up with £1,000. Subtracting this figure from the starting figure of £1,200 gives you a figure of £200, which is the VAT.
Calculating Vat: Reduced Rate
The reduced rate of VAT is 5%. The calculations you need to do are the same, except the multiplier or divider is now 1.05, rather than 1.2.
For example, if you needed to add the VAT, again to a £1,000 purchase, you simply multiply £1,000 by 1.5 to get the final sum of £1,050, the added £50 being the VAT figure.
Again, to go in the opposite direction, you simply divide the figure, in this case £1,050, by 1.5, which would take you back to £1,000 exclusive of VAT and leave you with £50 as the VAT value.
Remember that VAT rates are subject to change, and that you’ll need to amend your calculations accordingly depending on what the VAT rate is at any one time.