How to Calculate VAT: Adding and Removing VAT Explained
A step-by-step guide to adding VAT to a price, removing VAT from a gross amount, and avoiding the most common VAT calculation mistakes.
Two Types of VAT Calculations
There are two common VAT calculations people need to perform. The first is adding VAT to a net (pre-VAT) price to find the gross (VAT-inclusive) price. This is what a business does when pricing goods for sale. The second is removing VAT from a gross price to find the net amount. This is what you do when you want to know the pre-tax portion of a price that already includes VAT.
Both calculations use the same formula elements but in different arrangements. Getting them confused is the most common mistake, and using the wrong method produces meaningfully wrong results. Understanding which situation you are in before starting is important.
The VAT rate is always expressed as a percentage. For these calculations, you convert it to a decimal by dividing by 100. A 20% VAT rate becomes 0.20. A 5% rate becomes 0.05. The calculations then use 1 plus this decimal as the multiplier or divisor.
Step-by-Step: How to Add VAT
Adding VAT starts with the net price — the price before VAT is applied. Multiply the net price by one plus the VAT rate as a decimal. For a 20% VAT rate, multiply by 1.20. For a 15% rate, multiply by 1.15.
Example: a product costs $85 before VAT and the VAT rate is 20%. The gross price is $85 times 1.20, which equals $102. The VAT amount is $102 minus $85, which equals $17. You can confirm the VAT amount independently by multiplying the net price by just the rate: $85 times 0.20 equals $17.
If you need to calculate for multiple VAT rates, work through each product or service separately using its applicable rate. Do not average VAT rates across products with different rates, as that produces an incorrect result. Apply each rate to its own net price and then sum the individual VAT amounts.
Step-by-Step: How to Remove VAT
Removing VAT starts with the gross price — the VAT-inclusive price. Divide the gross price by one plus the VAT rate as a decimal. For a 20% VAT rate, divide by 1.20. For a 5% rate, divide by 1.05.
Example: you paid $120 for a product including 20% VAT and want to know the pre-VAT cost. Divide $120 by 1.20, which equals $100. The net price is $100 and the VAT is $20. Again, you can confirm: $100 times 0.20 equals $20, and $100 plus $20 equals $120.
A common mistake is to calculate the VAT by multiplying the gross price by the rate. Using the example above: $120 times 0.20 equals $24 — but this is wrong. The correct VAT is $20, not $24. Always divide the gross price by one plus the rate to correctly reverse a VAT-inclusive price. The multiplication shortcut only works when starting from the net price.
Using the VAT Calculator
A VAT calculator eliminates the arithmetic and reduces the chance of errors. To use one, select whether you want to add or remove VAT, enter the price amount, and enter the VAT rate. The calculator instantly shows both the net amount, the gross amount, and the VAT component.
Use the calculator when dealing with multiple items at different VAT rates, when accuracy is critical for invoicing or accounting, or when the VAT rate is an unusual number that makes manual calculation tedious. Most professional invoicing software also has VAT calculation built in.
When using a calculator, always double-check which mode you are in — add VAT or remove VAT. Entering a gross price into the add-VAT mode, or a net price into the remove-VAT mode, produces incorrect results that can create accounting errors or pricing mistakes.
Common Mistakes to Avoid
The most frequent error is multiplying a VAT-inclusive price by the rate to extract the VAT. As shown in the example above, this overstates the VAT. Dividing by one plus the rate is the correct method for working backwards from a gross price.
Another mistake is applying the wrong rate. Countries and sometimes categories of goods have multiple VAT rates. Standard, reduced, zero-rated, and exempt are all different treatments. Applying the standard rate to a zero-rated item produces incorrect results. Always confirm which rate applies to the specific goods or services before calculating.
When calculating VAT for invoices or tax returns, round at the end of the calculation rather than rounding intermediate steps. Rounding too early compounds errors, particularly when processing many transactions. Most tax authorities specify how rounding should be handled, so check the relevant guidance for your jurisdiction.