Data Source and Methodology
Authoritative Data Source: HMRC — VAT Notice 700: The VAT Guide (Updated 2024-04-01) and GOV.UK VAT rates.
Reference:
VAT Notice 700,
GOV.UK VAT rates.
All calculations strictly rely on the formulas and rates provided by these sources. All calculations are rigorously based on the formulas and data provided by this source.
- Adding VAT uses multiplication by (1 + rate/100).
- Removing VAT divides the gross by (1 + rate/100).
- Default rounding rounds VAT to the nearest penny (2 decimals).
The Formula Explained
$$ \text{VAT} = \text{Gross} - \text{Net} $$
$$ \text{Net} = \frac{\text{Gross}}{1 + \frac{r}{100}} $$
Where r is the VAT rate in percent (e.g., r = 20 for 20%).
Glossary of Variables
- Amount (net): Price before VAT is applied. Used when adding VAT.
- Amount (gross): Price including VAT. Used when removing VAT.
- VAT rate r (%): The applicable percentage (e.g., 20, 5, 0, or a custom value).
- VAT: The tax amount: VAT = Gross − Net.
- Gross: Final price paid, including VAT.
- Rounding: Approach used to present currency values (default: VAT rounded to 2 decimals).
Worked Example
How It Works: A Step-by-Step Example
Scenario 1 — Add VAT: Net = £100.00, r = 20.
- Compute Gross: Gross = 100 × (1 + 20/100) = 100 × 1.20 = £120.00
- Compute VAT: VAT = Gross − Net = 120 − 100 = £20.00
Scenario 2 — Remove VAT: Gross = £120.00, r = 20.
- Compute Net: Net = 120 ÷ 1.20 = £100.00
- Compute VAT: VAT = 120 − 100 = £20.00
With standard rounding, VAT is rounded to the nearest penny before summing totals where relevant.
Frequently Asked Questions (FAQ)
What VAT rates are used in the UK?
Standard 20%, reduced 5%, and 0% for certain goods/services. Some supplies are exempt (no VAT charged or reclaimed). Always confirm the correct rate on GOV.UK.
How do I add VAT correctly?
Multiply the net amount by (1 + r/100). Example: £100 at 20% → £120 gross; VAT = £20.
How do I remove VAT from a gross amount?
Divide the gross by (1 + r/100) to get net. Example: £120 at 20% → £100 net; VAT = £20.
What rounding method does HMRC expect?
Generally round to the nearest penny (2 decimals). This tool’s default rounds VAT to 2 decimals and then totals accordingly.
Does this tool cover reduced and zero-rated items?
Yes. Use the 5% or 0% presets, or enter a custom rate when needed. For exemptions, VAT is not charged.
Can I use these figures for invoicing?
Yes, but you remain responsible for using the correct VAT rate and treatment for your supply. For complex cases, consult your accountant or HMRC guidance.