How to Work Out VAT: Add, Remove and Reverse-Calculate the 20% Rate

Why VAT Trips People Up

Value Added Tax (VAT) is a consumption tax added to most goods and services sold in the UK. If you run a business, submit expenses, or simply want to know how much tax is buried in a receipt, you need to move confidently in both directions: adding VAT onto a net price, and removing VAT from a gross price.

Adding VAT is intuitive. Removing it is where the errors creep in, because the arithmetic is not symmetrical — and getting it backwards means over-claiming tax on every single invoice.

The UK VAT Rates

Before calculating anything, you need to know which rate applies to what you are selling or buying:

Standard rate – 20%: The default. Most goods and services, from electronics to professional fees.
Reduced rate – 5%: Domestic fuel and power, children's car seats, and certain energy-saving materials.
Zero rate – 0%: Most food, books, newspapers, children's clothing, and public transport.

Zero-Rated Is Not the Same as Exempt

This distinction catches out a lot of small business owners. Zero-rated sales are still taxable — they simply carry a 0% rate, so they count towards your turnover and you can still reclaim the VAT you paid on related costs. Exempt items (such as insurance, postage stamps, and most financial services) sit outside the VAT system entirely, and you generally cannot reclaim VAT on costs relating to them.

Adding VAT to a Net Price

To go from a net (VAT-exclusive) price to a gross (VAT-inclusive) price, multiply by 1 plus the rate expressed as a decimal.

Gross = Net × 1.20 (standard rate)
Gross = Net × 1.05 (reduced rate)

Example: You quote a client £850 for a job. 850 × 1.20 = £1,020, of which £170 is VAT.

If you only want the VAT figure itself, multiply the net price by 0.20: 850 × 0.20 = £170.

Removing VAT from a Gross Price

To work backwards from a VAT-inclusive price, you divide — you do not subtract a percentage.

Net = Gross ÷ 1.20 (standard rate)
Net = Gross ÷ 1.05 (reduced rate)

Example: A supplier invoice totals £1,020 including VAT. 1,020 ÷ 1.20 = £850 net, leaving £170 of VAT to reclaim.

The One-Sixth Shortcut (The VAT Fraction)

HMRC calls the multiplier used to extract tax from a VAT-inclusive price the VAT fraction. At the standard 20% rate it is beautifully simple:

VAT included in a 20% gross price = Gross ÷ 6

Example: A £54 restaurant bill contains 54 ÷ 6 = £9 of VAT. The net cost of the meal was £45.

Why One-Sixth Works

If the net price is 100 units, the gross price is 120 units and the VAT is 20 units. The VAT is therefore 20/120 of the gross, which cancels down to 1/6. The same logic gives you the reduced-rate fraction: 5/105 cancels to 1/21, so the VAT inside a 5% gross price is the total divided by 21.

The Most Expensive VAT Mistake

The single most common error is taking 20% off a gross price and calling the result the net figure. It does not work, because the 20% was calculated on the smaller net amount, not on the larger gross amount.

Correct: £120 ÷ 1.20 = £100 net, £20 VAT.
Wrong: £120 − 20% = £96 net, implying £24 of VAT.

That is £4 of VAT claimed that never existed — on a single £120 invoice. Repeat the error across a quarter's purchases and you have a reclaim that will not survive scrutiny. The gap widens the larger the invoice: on £12,000 it becomes £400.

Quick Reference at 20%

Working forwards, from net to gross:

£10 net → £2.00 VAT → £12.00 gross
£50 net → £10.00 VAT → £60.00 gross
£250 net → £50.00 VAT → £300.00 gross
£1,000 net → £200.00 VAT → £1,200.00 gross

Working backwards, from gross to net:

£30.00 gross → £5.00 VAT → £25.00 net
£59.99 gross → £10.00 VAT → £49.99 net
£250.00 gross → £41.67 VAT → £208.33 net
£1,200.00 gross → £200.00 VAT → £1,000.00 net

Rounding on Real Invoices

VAT calculations rarely land on a clean penny. Divide £250 by six and you get £41.6666..., which has to become a real figure on a real document.

Carry the full decimal through your calculation and round only at the end, to the nearest penny. HMRC's guidance in VAT Notice 700 also permits VAT-registered businesses to round the total VAT on an invoice down to the nearest penny, while retailers using a point-of-sale scheme are expected to round arithmetically. If you are issuing hundreds of invoices, confirm the treatment that applies to you on GOV.UK — the pennies compound.

Do You Actually Need to Charge VAT?

You must register for VAT once your taxable turnover over any rolling 12-month period passes the registration threshold, which stands at £90,000 at the time of writing. Note that this is a rolling window, not your accounting year — you need to check the last 12 months every month, not just at year end.

Many businesses also register voluntarily below the threshold so they can reclaim VAT on equipment and stock. Thresholds are revised in Budget announcements, so always confirm the current figure on GOV.UK before making a decision.

Conclusion

VAT arithmetic comes down to three moves: multiply by 1.2 to add it, divide by 1.2 to remove it, and divide by 6 to isolate the tax inside a gross price. Get those the right way round and your invoices, expense claims, and quotes will reconcile every time. When the numbers are messy or the reduced rate is involved, run them through a dedicated VAT Calculator so the rounding and the direction of travel are handled for you.

Try our VAT Calculator

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Related Calculators: Sales Tax Calculator