VAT Calculator

Adding and removing VAT: the formulas

To add VAT at 20%, multiply the net price by 1.2. To remove it, divide the gross price by 1.2, or find the VAT itself as one sixth of the gross price (the “VAT fraction”). For the 5% reduced rate, multiply by 1.05 or divide by 1.05; the VAT is 1/21 of the gross price.

A common mistake is to remove VAT by taking 20% off the gross price. On a £120 invoice that gives £96, but the correct net price is £100 and the VAT is £20.

Which rate applies

• Standard rate, 20%: most goods and services. It has been 20% since 4 January 2011, when it rose from 17.5%.
• Reduced rate, 5%: some goods and services such as children’s car seats and home energy.
• Zero rate, 0%: most food and children’s clothes. Zero-rated sales are still taxable supplies, so they count towards the registration threshold.
• Exempt: items such as postage stamps, financial services and most property transactions. Exempt sales do not count towards the threshold, and you cannot reclaim VAT on costs linked to them.

When a business must register

You must register if taxable turnover over the last 12 months goes over £90,000, or if you expect it to go over that in the next 30 days alone. This is a rolling 12-month test, checked every month, not a tax-year figure.

If you cross the threshold, register within 30 days of the end of that month. Your registration takes effect from the first day of the second month. Example: turnover passes the threshold on 15 July, so you must register by 30 August and charge VAT from 1 September.

You can register voluntarily below £90,000, which makes sense if most customers are VAT-registered businesses that can reclaim the VAT. You can ask to deregister if taxable turnover falls below £88,000.

Returns, payment and the Flat Rate Scheme

Most businesses file a VAT return every quarter through Making Tax Digital software. The return and payment are due one calendar month and 7 days after the end of the period, for example 7 May for a quarter ending 31 March.

The Flat Rate Scheme lets businesses with VAT-exclusive turnover of £150,000 or less pay a fixed percentage of gross turnover instead of working out VAT on each purchase. Newly registered businesses get a 1% discount in their first year. “Limited cost businesses”, whose goods cost less than 2% of turnover or under £1,000 a year, pay a higher 16.5%, which often makes the scheme poor value for consultants and freelancers.

Worked example: the Flat Rate Scheme

GOV.UK gives the example of a photographer with a flat rate of 11% who bills a customer £1,000 plus 20% VAT, £1,200 in total. They pay HMRC 11% of £1,200, which is £132, and keep the remaining £68 of the VAT charged, but cannot reclaim VAT on most purchases.

The scheme works best for businesses with few VAT-bearing costs. A business that buys a lot of stock or equipment is usually better off on standard VAT accounting, where it reclaims VAT on each purchase.

What registration means for prices

A business selling to consumers at the same prices after registering loses one sixth of its takings to VAT. A trader with £95,000 of VAT-inclusive sales would pay about £15,833 of output VAT before reclaiming VAT on costs. That is why small traders close to the £90,000 threshold watch their rolling 12-month turnover closely.

Selling mainly to VAT-registered businesses is different: they reclaim the VAT you charge, so registration has little effect on what the customer really pays.