Guide to calculating VAT when only the gross figure is known
A common error, when given a gross (VAT inclusive) value, is to calculate the VAT as 20% of this figure.
This is incorrect!!!
The VAT is calculated on the net value (the figure before VAT) and is a much lower amount than the result you get from the calculation above.
The good news is with a little thought we can devise a very easy way to work out the correct amount.
1) Let’s say we have goods valued at £10.00 excluding VAT.
2) The VAT is 20% x £10.00 which is £2.00.
3) The gross figure (the amount the customer will pay) is £10.00 plus £2.00 = £12.00.
4) For every ‘12’ of gross value, the VAT is, therefore ‘2’.
5) This means that we can calculate the VAT content of any gross figure by dividing it by 12 and multiplying by 2.
6) Test it on some figures:
Price including VAT is £24.00
24/12 = 2 and 2 x 2 = 4 so the VAT amount is £4.00
Now calculate the net value 24 – 4 = 20 so the net amount is £20.00
Final check: £20.00 x 20% = £4.00 £20.00 + £4.00 = £24.00
Whilst the VAT rate is 20% you can simplify this further from 20/120 to 1/6 which
means you can just divide the gross by 6 to find the VAT.
Likewise, you can calculate the VAT to be added to a net amount by simply dividing by 5
as 20% is of course 1/5th.