When has 2020 begun there were already endless changes in the tax law. One change was the introduction of the receipt obligation. Now you have a closer look at the voucher. Gross? Net? 5%? 20%? Actually, it is rather simple! The following article explains how you can easily calculate your VAT, you gross and net prices.
Antonia KlattLast Updated on 28 September 2020
How to Calculate VAT – Introduction
We always pay the VAT at the time of purchase. No matter if we buy a new TV or just want to have a quick lunch.
The value added tax (VAT) is a consumption tax. As the name suggests, it is paid by the consumer. But who is the consumer? The consumer is usually the end user. Before going any further, in this article we will take the example of the UK and the tax rates there on formulas and invoices.
Let’s say you go shopping in the supermarket and pay € 1.20 for a beer, then you pay € 1.00 for your beer and € 0.20 in taxes. The supermarket takes the money and pays the € 0,20 to the tax office. The supermarket keeps the € 1,00. This is the net price. You as a consumer pay the gross price. This price is € 1,20.
NOTE: All EU countries have their own VAT rates, >here< you can find a list of them.
Calculate 20% VAT and 5% VAT
Now we come to the point to calculate the included VAT.
Briefly speaking, there a 3 VAT rates in the UK, the standard rate of 20% which applies to most products, the reduced VAT rate of 5% and the 0% rate. >Here< you can find out more about all VAT rates in the UK and when and for which goods/services they apply.
If you go to the hairdresser, it is a service that is taxed at 20%. The hairdresser wants to be paid € 15,00 for his service. This is a net amount. If you are satisfied with his work, you pay his bill. You will then pay € 18. This is 120% of the hairdresser’s target price. Of this, the hairdresser only has to pay € 3 to the tax office and may keep his 15,00.
You calculate 20% VAT by calculating the net amount x 1.20, then you have the gross amount. If you want to know how much VAT is in the amount, you calculate the gross amount / 1.20 = net amount * 0.20. The result is the VAT included.
Now you go to the supermarket and buy fruit. Fruit is subject to the reduced tax rate of 5% VAT. Basic foodstuffs are subject to the reduced rate of 5% VAT.
Exceptions are for example caviar or lobster. The supermarket now makes a super offer. A banana and an apple for € 1.00. There you strike immediately and look on the receipt. Weren’t we at 20% VAT? Not quite, because food is usually subject to the reduced tax rate.
But the supermarket is not allowed to keep everything. € 1,00 is the gross price. Now you calculate € 1.00 / 1.05 = € 0.95. This is the net price. Now calculate € 0.95*0.05. The result is € 0.05 (rounded up). This is the VAT included in the gross price and so you can calculate the included VAT. The supermarket must now pay this € 0.05 to the tax office and the € 0.95 will be withheld.
When do I have to calculate VAT?
Now you want to sell your old record collection and know that you would have to charge 20% VAT. But this only applies if you are an entrepreneur. If you are not and only sell something on ebay from time to time, you don’t have to charge VAT.
However, there is one exception for entrepreneurs: the small businesses. Although they are entrepreneurs, they do not show VAT on their invoices – at least not when making use of the small business regulation. Not all EU countries do have such tax regulations but some do, the best way is to check for such a possibility individually in the country you are selling in.
Formula to calculate VAT from gross, included VAT and more
Here now again the formula to calculate VAT from gross or how to calculate the included VAT, calculate prices without VAT, calculate 20% VAT and calculate 5%.
|Calculate included VAT of 20%: Gross price / 1.20 * 0.20 = VAT included|
|Calculate included VAT of 5%: Gross price / 1.05 * 0.05 = VAT included|
|Calculate price without VAT of 20%: Gross price / 1.20= Net price (without VAT)|
|Calculate price without VAT of 5%: Gross price / 1.05 = Net price (without VAT)|
|Calculate price with VAT of 20%: Net price * 1.20 = Gross price (with VAT)|
|Calculate price with VAT of 5%: Net price * 1.05 = Gross price (with VAT)|
These formulas can easily be used, for example, to calculate the value added tax in Excel sheets.
Now your receipt is probably more understandable. The net price is the price the entrepreneur would pay for it. You pay the gross price as a consumer. Usually the tax rate of 20% is used. Except a reduced VAT rate applies for the product. Then the tax rate of 5% is used.