How to Remove VAT from a Price (and Why Minus 20 Percent Is Wrong)

This is the most common piece of arithmetic in UK small business and one of the most commonly botched. The 20 percent is charged on the net price, not the gross one, so the two directions are not symmetrical.

Why subtracting 20 percent is wrong

Work it forwards. A £100 net price plus 20 percent VAT is £120 gross. The VAT is now £20 out of £120, which is 16.67 percent of what the customer paid, not 20 percent. Stripping VAT from a gross figure therefore means taking off 16.67 percent, and the clean way to do that is to divide by 1.2.

Try a £450 gross invoice. 450 / 1.2 = £375 net, with £75 of VAT. Subtract 20 percent instead and you get £360, understating the net by £15 and overstating the VAT you think you can reclaim by the same amount. Repeat that across a quarter of purchase invoices and the error stops being small.

The shortcuts worth memorising

At 20 percent, the VAT inside a gross price is the gross divided by 6. £450 / 6 = £75, and that is the fastest mental check there is. At the reduced 5 percent rate, which covers domestic gas and electricity, children's car seats and some mobility aids, divide the gross by 1.05 for the net and by 21 for the VAT. A £105 energy bill is £100 net and £5 VAT.

Where getting it backwards actually hurts

Pricing is the big one. Say you sell an item at £59.99 including VAT. Your net revenue is 59.99 / 1.2 = £49.99, and £10.00 belongs to HMRC. If the product costs you £30, your gross margin is £19.99, not the £29.99 the shelf price suggests. Sellers who register for VAT mid-year and forget to reprice find this out the hard way, because nothing on the shelf changed but a sixth of the takings now belongs to someone else.

The same trap sits in marketplace payouts, which land as gross amounts, and in expense claims where the receipt shows only a total. It also makes UK prices hard to compare with American ones, where tax is added at the till rather than baked into the label, a difference we cover in sales tax against VAT.

Using the VAT calculator

Two decisions before you type anything. First, is your figure gross or net? Gross means the VAT is already inside it and you want it out. Net means you are adding VAT on. Picking the wrong direction produces answers that are out by exactly the £4 gap in the example above.

Second, which rate? Standard 20 percent covers most goods and services. Reduced 5 percent covers a short list. Zero rate covers most food, children's clothing, books and newspapers, and zero-rated is not the same as exempt: zero-rated sales still count towards taxable turnover and still let you reclaim input VAT, while exempt sales do neither.

Rounding on invoices

HMRC lets you round VAT down to the nearest penny on an invoice line. On one item nobody notices. Across a thousand lines it drifts, so calculate VAT on the total rather than line by line, and keep the method the same from quarter to quarter.

Common questions

What is the VAT registration threshold? £90,000 of taxable turnover in any rolling 12 months, the figure since April 2024. Rolling is the word to notice: it is not your accounting year, it is any 12 consecutive months. You can also register voluntarily below it, which suits businesses selling mainly to other registered businesses. Our small business VAT guide goes through that decision properly.

My receipt does not show VAT separately. Can I still reclaim it? For purchases up to £250 including VAT, a simplified VAT invoice is enough. It needs the supplier's VAT number, the date, a description and the rate applied. From that you work the VAT out yourself by dividing by 6. Above £250 you need a full VAT invoice with the amounts shown.

Can I reclaim VAT if I am not registered? No. Input VAT recovery exists only for registered businesses. It is one reason a business with heavy VAT-bearing costs and mostly business customers might register early rather than wait for the threshold.

Is VAT charged before or after a discount? After. VAT applies to what the customer actually pays. Sell a £100 net item with a 10 percent discount and the VAT is 20 percent of £90, so £18, making the gross £108.