How to add VAT to a price, and take it off again

VAT arithmetic is simple, and it is still wrong on a surprising number of invoices. This guide gives you the two sums, the rates, the one mistake to avoid, and a plain answer to "do I even need to charge it?". It is general information, not tax advice; the rules and thresholds are on gov.uk and change from time to time.

The two sums

Adding VAT at the standard rate of 20%: multiply the net price by 1.2.

£250 net × 1.2 = £300 gross. The VAT is £50.

Removing VAT from a gross price: divide by 1.2. Do not take 20% off.

£300 gross ÷ 1.2 = £250 net. The VAT is £50.

That second line is where people go wrong. Taking 20% off £300 gives £240, which is £10 too low, because the 20% was added to the net figure, not the gross one. A quicker way to find the VAT inside a gross price at 20% is to divide by 6: £300 ÷ 6 = £50.

For the other rates the same logic holds:

Which rate applies

Most goods and services in the UK are standard rated at 20%. The reduced rate of 5% covers a short list, including domestic fuel and power and some energy-saving installations. Zero rate covers things like most food, books and children's clothes: these are still VAT sales, at 0%, and count towards your VAT-able turnover. Exempt is different again (insurance, most financial services, some education and health): no VAT, and they do not count towards the threshold. If you are unsure which your work is, HMRC's rate lists are the place to check, and the answer is worth getting right once.

Do you need to charge VAT at all?

Only if you are VAT registered. Registration is compulsory once your VAT-able turnover in any rolling 12 months goes over the threshold, which is currently £90,000 (check gov.uk; it changes). Below that you can choose to register voluntarily.

If you are not registered:

• You do not add VAT to anything, and you must not show VAT on invoices or quotes.
• You cannot reclaim the VAT you pay on your own costs. It is simply part of the cost.
• Say so on quotes: "no VAT to add" stops a business customer wondering.

If you are registered:

• You charge VAT on your sales at the right rate and pay it to HMRC, less the VAT on your business purchases.
• Your invoices must show your VAT number, the rate and the VAT amount.
• Business customers who are registered themselves reclaim what you charge them, so VAT is not really a cost to them. Consumers and unregistered businesses pay it in full.

Quoting: say which price you mean

The most common VAT argument between a small business and its customer is a quote of "£2,000" that one side read as including VAT and the other as excluding it. Two habits prevent it:

• Business customers: quote net and say "plus VAT at 20% (£400)". They think in net figures.
• Consumers: quote the total they will pay, and state that it includes VAT. Consumer pricing rules expect the all-in price.

Whichever you do, show both numbers on the quote itself.

Rounding

Work out VAT on the total of an invoice, or line by line, but be consistent. HMRC allows rounding to the nearest penny (and on line-by-line calculations, rounding down to the nearest 0.1p). Whatever method you use, the VAT shown must be what you actually add up and pay over.

A quick check before you send anything

1. Are you registered? If not, no VAT anywhere.
2. Is the rate right for this kind of work?
3. Net × 1.2 = gross, and gross ÷ 1.2 = net. Both should agree.
4. Does the document say whether the headline price includes VAT?