Add VAT vs Remove VAT: Complete UK Guide for Businesses

Understanding the difference between adding VAT and removing VAT is fundamental for UK businesses, freelancers, and contractors. While both processes involve VAT calculations, they serve different purposes and use different formulas. Using the wrong method can lead to incorrect pricing, inaccurate VAT returns, and potential compliance issues with HMRC. This guide explains when to add VAT, when to remove VAT, and how to calculate each correctly with practical examples.

What is Adding VAT?

Adding VAT means calculating the total price a customer pays by applying VAT to a net (excluding VAT) price. This is the most common calculation for businesses when creating invoices, quotes, or price lists. You start with the base price of your goods or services and add the appropriate VAT rate to arrive at the final amount.

When you add VAT, you’re determining two figures:

• The VAT amount itself (the tax portion)
• The gross price (the total including VAT)

This calculation is essential when you know your selling price before VAT and need to work out what to charge customers. For detailed methods on this process, see our guide on UK vat rates.

What is Removing VAT?

Removing VAT (also called deducting VAT or extracting VAT) means calculating the net price from an amount that already includes VAT. This process works backwards from the total price to find the base price before VAT was added. You’re essentially reversing the adding VAT calculation.

When you remove VAT, you typically want to find:

• The net price (the amount before VAT)
• The VAT amount that was included

This calculation is crucial when analysing receipts, calculating how much VAT you can reclaim on business expenses, or working backwards from retail prices to determine your margin.

The Key Difference

The fundamental difference lies in your starting point and direction of calculation:

• Adding VAT: Net price → Gross price (going forward)
• Removing VAT: Gross price → Net price (going backward)

This distinction matters because the formulas are different. Many people mistakenly think they can simply add 20% to add VAT and subtract 20% to remove it, but mathematics doesn’t work that way. The percentage applies to different base amounts in each direction.

How to Add VAT: Formulas and Examples

The Standard 20% Rate

To add VAT at the standard 20% rate, use these formulas:

• Gross price = Net price × 1.20
• VAT amount = Net price × 0.20

Example 1: Simple Invoice

You’re invoicing £750 for consulting services. To add VAT:

• Net price: £750
• VAT amount: £750 × 0.20 = £150
• Gross price: £750 × 1.20 = £900

Your invoice shows £750 net, £150 VAT, and £900 total.

Example 2: Retail Pricing

A shop wants to achieve £40 profit per item with costs of £60. The selling price before VAT is £100:

• Net selling price: £100
• VAT: £100 × 0.20 = £20
• Customer pays: £120

The Reduced 5% Rate

For items qualifying for the reduced rate, use these formulas:

• Gross price = Net price × 1.05
• VAT amount = Net price × 0.05

Example 3: Energy Bill

A quarterly domestic energy bill of £300 (net):

• Net amount: £300
• VAT amount: £300 × 0.05 = £15
• Total bill: £300 × 1.05 = £315

The Zero 0% Rate

For zero-rated items, no VAT is added, but the transaction still counts as taxable:

• Gross price = Net price × 1.00
• VAT amount = £0

A VAT calculator can quickly perform these calculations across all rates, ensuring accuracy when dealing with multiple items or complex invoices.

How to Remove VAT: Formulas and Examples

The Standard 20% Rate

To remove VAT from an amount that includes 20% VAT, use these formulas:

• Net price = Gross price ÷ 1.20
• VAT amount = Gross price – Net price
• VAT amount (quick method) = Gross price ÷ 6

Example 4: Expense Receipt

You purchased office supplies for £144 including VAT. To deduct VAT:

• Gross price: £144
• Net price: £144 ÷ 1.20 = £120
• VAT amount: £144 – £120 = £24

You can reclaim £24 VAT on your VAT return.

Example 5: Retail Analysis

A competitor sells a product for £84 including VAT. To understand their pricing:

• Retail price: £84
• Net price: £84 ÷ 1.20 = £70
• VAT portion: £84 – £70 = £14

The Reduced 5% Rate

To remove 5% VAT from a gross amount:

• Net price = Gross price ÷ 1.05
• VAT amount = Gross price – Net price

Example 6: Energy Cost Analysis

Your energy bill shows £420 including VAT:

• Gross amount: £420
• Net price: £420 ÷ 1.05 = £400
• VAT included: £420 – £400 = £20

Why You Can’t Just Add or Subtract 20%

A common mistake is thinking you can add 20% to add VAT and subtract 20% to remove it. This doesn’t work because percentages apply to different base amounts.

The Mathematical Reason

When you add 20% VAT to £100:

• £100 + (£100 × 0.20) = £120

If you then subtract 20% from £120:

• £120 – (£120 × 0.20) = £120 – £24 = £96

You get £96, not the original £100. This is because you’re taking 20% of different amounts (£100 when adding, £120 when subtracting).

The Correct Approach

To remove VAT correctly, you must divide by 1.20:

• £120 ÷ 1.20 = £100

This gives you the correct net price. Understanding this distinction is crucial for accurate financial calculations and HMRC compliance.

When to Add VAT

You need to add VAT in these common business scenarios:

• Creating invoices: When billing customers, you typically work from your service or product price and add VAT to calculate the total
• Preparing quotes: When providing cost estimates, show both net and gross amounts
• Setting retail prices: When you know your desired margin and need to calculate the shelf price
• Price lists: When publishing catalogues or online prices that need to show VAT-inclusive amounts
• Financial planning: When forecasting revenue including VAT to understand cash flow

In these situations, you start with the net amount (your base price) and calculate what the customer ultimately pays.

When to Remove VAT

You need to remove VAT in these situations:

• Analysing expenses: When reviewing business receipts to determine how much VAT you can reclaim
• Completing VAT returns: When calculating input VAT from purchases that show gross amounts
• Financial reporting: When separating VAT from revenue or expenses for accounting purposes
• Competitor analysis: When examining rival pricing to understand their net prices and margins
• Calculating margins: When working backwards from a final price to determine profitability
• Correcting errors: When you’ve accidentally used a VAT-inclusive figure in calculations requiring net amounts

In these situations, you start with the gross amount (the total including VAT) and extract the net price and VAT components.

Practical Tools and Methods

Manual Calculation

For occasional calculations, you can work out VAT manually using the formulas provided. Keep a calculator handy and double-check your arithmetic, especially when dealing with large amounts or multiple items.

Spreadsheet Formulas

For regular calculations, spreadsheets are efficient. Use these formulas in Excel or Google Sheets:

• Add VAT: =A1*1.2 (where A1 contains the net price)
• Remove VAT: =A1/1.2 (where A1 contains the gross price)
• Find VAT amount when adding: =A1*0.2
• Find VAT amount when removing: =A1/6

Online VAT Calculators

A VAT calculator provides the fastest and most reliable method for both adding and removing VAT. Simply enter the amount, select your calculation type, and receive instant accurate results. This eliminates calculation errors and saves time, particularly when processing multiple transactions.

Common Mistakes and How to Avoid Them

Mistake 1: Using the Wrong Formula Direction

Multiplying when you should divide (or vice versa) is the most common error. Always identify whether you’re starting with a net or gross amount before choosing your formula.

Mistake 2: Confusing Net and Gross

Some receipts only show the total without clarifying whether VAT is included. When in doubt, assume retail prices include VAT unless specifically stated otherwise. Business-to-business quotes often exclude VAT unless marked “inc. VAT”.

Mistake 3: Applying the Wrong Rate

Ensure you’re using the correct VAT rate (20%, 5%, or 0%) for the specific goods or services. Using standard rate formulas on reduced-rate items creates significant errors.

Mistake 4: Rounding Prematurely

When calculating VAT on multiple items, complete all calculations before rounding. Rounding each item individually can create accumulating errors. HMRC allows rounding to the nearest penny on the final VAT amount.

Mistake 5: Double-Counting VAT

Never add VAT to an amount that already includes it, or remove VAT twice. This typically happens when processing a mixture of invoices, some showing net and others showing gross amounts.

VAT and Pricing Strategy

B2B Pricing

When selling to other VAT-registered businesses, showing net prices is common practice. Your customers can reclaim the VAT, so they focus on the net cost. Invoices typically show net, VAT, and gross clearly separated.

B2C Pricing

When selling to consumers, displaying VAT-inclusive prices is often preferable and sometimes legally required. Customers care about the total amount they pay, not the VAT breakdown. However, receipts must still show the VAT component.

Price Positioning

Understanding whether to add or remove VAT helps with competitive pricing. If competitors display £99 including VAT, you know their net price is £82.50. This lets you position your offerings accurately.

Record Keeping and HMRC Compliance

Proper VAT calculations support accurate record keeping. HMRC requires VAT-registered businesses to maintain detailed records showing:

• Sales invoices with VAT clearly calculated and displayed
• Purchase receipts showing VAT paid that can be reclaimed
• The calculation method used for each transaction
• Any adjustments or corrections to VAT amounts

Using consistent calculation methods and tools ensures your records are audit-ready. Whether you add VAT or remove it, document your process and keep supporting calculations with your financial records.

Multiple Items at Different Rates

When dealing with invoices containing items at different VAT rates, calculate each rate separately before totalling.

Example 7: Mixed-Rate Invoice

An invoice contains:

• Office furniture (standard rate): £500 net → £500 × 1.20 = £600
• Books (zero rate): £100 net → £100 × 1.00 = £100
• Energy-saving equipment (reduced rate): £200 net → £200 × 1.05 = £210

Invoice totals:

• Total net: £800
• Total VAT: £110 (£100 + £0 + £10)
• Total gross: £910

When removing VAT from a mixed-rate receipt, you need to know which items are at which rate to calculate correctly. This is why detailed receipts are important for VAT reclaims.

Frequently Asked Questions

What is the difference between adding VAT and removing VAT?

Adding VAT means calculating the total price including VAT from a net price by multiplying by 1.20 (for 20% VAT). Removing VAT means extracting the net price from a gross amount by dividing by 1.20. Adding VAT is used when creating invoices and working from your base price, while removing VAT is used when analysing receipts or calculating reclaimable VAT from expenses.

How do I add 20% VAT to a price?

To add 20% VAT to a net price, multiply the amount by 1.20. For example, £100 × 1.20 = £120 including VAT. Alternatively, you can multiply by 0.20 to find just the VAT amount (£100 × 0.20 = £20), then add this to the original price. Both methods give the same result.

How do I remove VAT from a gross amount?

To deduct VAT from a price that includes VAT, divide the gross amount by 1.20 for the 20% rate. For example, £120 ÷ 1.20 = £100 net. To find just the VAT portion, you can also divide the gross amount by 6, which gives the same result: £120 ÷ 6 = £20 VAT.

Why can’t I just subtract 20% to remove VAT?

Subtracting 20% from a gross amount gives an incorrect result because VAT is calculated as a percentage of the net price, not the gross price. If you subtract 20% from £120, you get £96 (£120 – £24), but the correct net price is £100. The 20% VAT was added to £100, not to £120, so you must divide by 1.20 to reverse the calculation correctly.

When should I add VAT and when should I remove VAT?

Add VAT when creating invoices, quotes, or price lists where you start with net prices and need to calculate what customers pay. Remove VAT when analysing receipts, calculating reclaimable VAT on business expenses, completing VAT returns, or working backwards from retail prices to find the net amount. The key is identifying whether your starting figure is net (add VAT) or gross (remove VAT).

Summary

Understanding the difference between adding VAT and removing VAT is essential for accurate business accounting and HMRC compliance. Adding VAT (multiplying by 1.20) calculates what customers pay from your base price, while removing VAT (dividing by 1.20) extracts the net amount from a VAT-inclusive total. These processes are not reversible using simple addition and subtraction, which is why using the correct formula matters.

Whether you’re creating invoices, analysing expenses, or planning pricing strategy, knowing which calculation to use and how to perform it correctly ensures financial accuracy. Take time to verify your calculations, especially on large transactions, and maintain detailed records supporting your VAT calculations for HMRC compliance.