Value Added Tax (VAT)
$$\text{VAT Amount} = \text{Net Price} \times \frac{\text{VAT Rate}}{100}$$
What is Value Added Tax (VAT)?
Value Added Tax (VAT) is a multi-stage consumption tax. Unlike sales tax, which is collected only at the final retail sale, VAT is collected at every stage of production and distribution. A manufacturer pays VAT when buying raw materials, a wholesaler pays VAT when buying finished goods, and a retailer pays VAT when buying stock - but each claims back the VAT it paid on its inputs from the government. Only the net value added at each stage is actually taxed.
The end consumer bears the full VAT cost because they cannot reclaim it. For a business, VAT is broadly neutral - they collect it on sales and reclaim it on purchases. Over 175 of 193 UN member countries use VAT as their primary consumption tax, with standard rates ranging from 4.5% (Andorra) to 27% (Hungary). The EU average standard rate is 21.9% (Tax Foundation, 2026). The United States is the only major economy that does not have a federal VAT.
When to use Value Added Tax (VAT)
Use the VAT formula when creating invoices (add VAT to a net price), pricing products for sale in a VAT country, or reverse-calculating the net price from a tax-inclusive total. Businesses registered for VAT must always show the net price, VAT amount, and gross price separately on invoices.
Worked examples
| Net price | VAT rate | VAT amount | Gross price |
|---|---|---|---|
| £100.00 | 20% (UK) | £20.00 | £120.00 |
| €500.00 | 19% (Germany) | €95.00 | €595.00 |
| €200.00 | 25% (Sweden) | €50.00 | €250.00 |
| AU$300.00 | 10% (Australia GST) | AU$30.00 | AU$330.00 |
Common pitfalls
The most common reverse-calculation mistake is subtracting the VAT percentage directly from the gross price. For a £120 gross at 20% VAT, subtracting £120 x 0.20 = £24 gives £96 net - which is wrong. The correct method is £120 / 1.20 = £100.00. Always divide by (1 + rate) to extract VAT from a gross price.
Frequently asked questions
How do I calculate VAT on a price?
Multiply the net price by the VAT rate divided by 100 to get the VAT amount, then add it to the net price. At 20% VAT on £100: £100 x 0.20 = £20 VAT; gross = £120. Use the VAT calculator at calculations.tools/tax/vat-calculator to do this instantly.
How do I remove VAT from a gross price?
Divide the gross price by (1 + VAT Rate / 100). For £120 gross at 20% VAT: £120 / 1.20 = £100 net. The VAT was £20. Never subtract the percentage directly from the gross - that method overstates the tax and gives the wrong net price every time.
What is the difference between VAT and GST?
VAT and GST are the same type of tax with different names. Both are multi-stage consumption taxes where businesses reclaim input tax. Europe, the UK, and most of Africa and Asia call it VAT; Australia, Canada, India, New Zealand, and Singapore call it GST. The calculation formula is identical.