VAT trips people up constantly — especially removing it from a price that already includes it. Here's the exact method for every scenario, including the mistake almost everyone makes.
VAT (Value Added Tax) is 20% in the UK for most goods and services. The maths sounds simple — until you need to remove it from a price that already includes it, and most people get it wrong.
This is straightforward. You have the pre-VAT price and need the final price.
You have a price that already includes VAT and need the pre-VAT figure. The mistake nearly everyone makes: subtracting 20% from the gross price.
Why is subtracting 20% wrong? Because the 20% VAT was calculated on the net price, not the gross. When you subtract 20% of the gross, you're using a larger base number and get a different (wrong) result.
Zero-rated and exempt sound the same but are legally different. Zero-rated goods still count as taxable supplies for VAT registration purposes; exempt supplies do not.
On a VAT receipt, businesses must show the VAT amount separately. To verify it's correct:
Businesses must register for VAT once their taxable turnover exceeds £90,000 in a rolling 12-month period (as of 2024). Below this threshold, registration is optional. Once registered, you must charge VAT on your sales but can also reclaim VAT on your business purchases.
For a small business near the threshold, the registration decision has significant cash flow and pricing implications — it's worth modelling carefully before you hit the limit rather than scrambling when you cross it.