Value-added tax is built into the prices you see across the UK and Europe: the £99.99 tag on a shelf includes the tax, and the shop legally cannot add anything extra at the register. That single fact explains both directions of VAT math — how to add VAT to a price and, more commonly, how to pull it back out of one.
The two calculations
Adding VAT is multiplying: net × (1 + rate). Adding 20% to a £100 net price means × 1.20, giving £120 gross with £20 of VAT. Removing VAT from an inclusive price is division: gross ÷ (1 + rate). £120 with VAT at 20% is £120 ÷ 1.20 = £100 net, and the £20 difference is the VAT.
gross = net × (1 + rate) net = gross ÷ (1 + rate) vat = gross − net
The mistake that over-removes tax
The classic error is subtracting the rate from the gross price — taking 20% off £120 and reporting £96 as the net. That is wrong: it removes 20% of a price that already contains VAT, which carves out too much. The correct net is £100, because the tax is 20% of the net, not 20% of the gross. This is the single most common VAT error people bring to a calculator.
- Correct: £120 ÷ 1.20 = £100 net, £20 VAT.
- Wrong: £120 × 0.80 = £96 “net”, £24 “VAT” — removes too much tax.
Rates you will actually meet
In the UK the standard rate is 20%, with a 5% reduced rate for some domestic fuel and energy, and 0% for essentials like food and children’s clothing. Across the EU the standard rates range roughly from 17% to 27% depending on the member state, with reduced rates on top — which is why any VAT tool worth using offers custom rates, not just a single preset.
For a business to charge VAT, it normally needs to be registered past a turnover threshold; consumers do not reclaim VAT at all. When you present an invoice with VAT, the standard practice is to quote the net amount, the VAT portion and the gross total separately — exactly the three figures a VAT calculator shows side by side.
VAT vs. sales tax
VAT is included in displayed prices and collected at every stage of the supply chain. United States-style sales tax is added at the register, on top of the shelf price, and only at the final point of sale. The two are economically similar but arithmetically different — so check which regime your customer operates under before quoting a total, and use a sales-tax calculator for the US model.
