How to Remove VAT from a Price: UK Guide with Examples

Removing VAT from a price is a common task for UK businesses, accountants, and anyone who needs to identify the net amount from a VAT-inclusive price. Whether you’re reconciling supplier invoices, preparing financial records, or calculating your VAT liability, understanding how to correctly deduct VAT is essential for accurate accounting and HMRC compliance.

This guide explains the step-by-step process of removing VAT from prices in the UK, covers the different VAT rates, and provides practical examples to help you work out VAT with confidence.

Why You Need to Remove VAT from Prices

There are several scenarios where businesses need to remove VAT from a gross price:

Completing VAT returns – separating the VAT component from your sales to report to HMRC
Reclaiming input VAT – identifying how much VAT you’ve paid on business purchases
Financial reporting – calculating your actual revenue excluding VAT
Pricing analysis – comparing net prices from different suppliers
Invoice verification – checking that suppliers have calculated VAT correctly

Understanding the correct method to deduct VAT ensures your financial records remain accurate and compliant with UK tax regulations.

UK VAT Rates Overview

Before removing VAT from any price, you need to identify which VAT rate has been applied. The UK operates three main VAT rates:

Standard rate (20%) – applies to most goods and services
Reduced rate (5%) – applies to specific items such as domestic fuel, children’s car seats, and certain renovations
Zero rate (0%) – applies to items like most food, books, newspapers, and children’s clothing

Most business transactions involve the standard 20% rate. For comprehensive information about which rate applies to specific goods and services, see our guide to UK VAT rates explained.

The Formula for Removing VAT

Removing VAT requires a different calculation from adding VAT. Many people mistakenly try to simply subtract 20% from a VAT-inclusive price, but this produces an incorrect result.

The correct formula for removing VAT is:

Net price = Gross price ÷ (1 + VAT rate)

For the standard 20% rate, this becomes:

Net price = Gross price ÷ 1.20

To calculate just the VAT amount:

VAT amount = Gross price – Net price

Alternatively:

VAT amount = Gross price × (VAT rate ÷ (1 + VAT rate))

For 20% VAT, this simplifies to:

VAT amount = Gross price × (20/120) or Gross price × 0.1667

Step-by-Step: How to Remove VAT from a Price

Follow these steps to remove VAT from any gross price:

Step 1: Confirm the Gross Price

The gross price is the total amount including VAT. This is sometimes shown as “VAT-inclusive” or “inc. VAT” on invoices and receipts. Ensure you’re starting with the correct figure.

Step 2: Identify the VAT Rate Applied

Confirm which VAT rate has been applied to the transaction. Most goods and services use the standard 20% rate, but always verify this before calculating.

Step 3: Divide by the VAT Multiplier

Divide the gross price by 1.20 (for standard rate) to get the net price. For a £120 gross price:

£120 ÷ 1.20 = £100

Step 4: Calculate the VAT Amount

Subtract the net price from the gross price to find the VAT amount:

£120 – £100 = £20

Step 5: Verify Your Calculation

Check your result by adding VAT back to the net price. If you get the original gross price, your calculation is correct:

£100 × 1.20 = £120 ✓

Practical Examples of Removing VAT

Here are real-world examples demonstrating how to remove VAT from different prices:

Example 1: Standard Rate (20%) on Equipment Purchase

A business purchases office equipment for £600 including VAT.

Gross price: £600
Net price: £600 ÷ 1.20 = £500
VAT amount: £600 – £500 = £100

Example 2: Standard Rate on Professional Services

An invoice from a consultant shows a total of £1,440 including VAT.

Gross price: £1,440
Net price: £1,440 ÷ 1.20 = £1,200
VAT amount: £1,440 – £1,200 = £240

Example 3: Reduced Rate (5%) on Domestic Fuel

A heating bill shows £315 including VAT at the reduced rate.

Gross price: £315
Net price: £315 ÷ 1.05 = £300
VAT amount: £315 – £300 = £15

Example 4: Multiple Items on One Invoice

A supplier invoice shows a total of £2,400 including VAT for various items all at the standard rate.

Gross total: £2,400
Net total: £2,400 ÷ 1.20 = £2,000
Total VAT: £2,400 – £2,000 = £400

Why You Can’t Just Subtract 20%

A common mistake is thinking that removing 20% VAT means simply subtracting 20% from the gross price. This produces an incorrect result.

Here’s why this doesn’t work:

If an item costs £100 net and you add 20% VAT, the gross price becomes £120. However, if you then subtract 20% from £120, you get £96, not the original £100.

Incorrect method:
£120 – (20% of £120) = £120 – £24 = £96 ✗

Correct method:
£120 ÷ 1.20 = £100 ✓

This is because the VAT is 20% of the net price, not 20% of the gross price. Always use the division method to remove VAT accurately.

Common Scenarios for Removing VAT

Processing Supplier Invoices

When you receive invoices from suppliers, you need to identify the net amount and VAT amount separately for your accounting records. This allows you to reclaim input VAT on your VAT return if you’re VAT-registered.

Completing VAT Returns

HMRC requires you to report the net value of your sales and the VAT charged separately. If your sales figures include VAT, you must remove it to complete your VAT return correctly.

Reconciling Bank Statements

Bank transactions often show VAT-inclusive amounts. To match these to your accounting records, you may need to work out VAT and separate the net amount from the VAT component.

Comparing Supplier Prices

When comparing quotes from different suppliers, some may show prices excluding VAT while others include it. Removing VAT allows you to compare like-for-like net prices.

Calculating Business Expenses

For expense reporting and profit calculations, you need to know the net cost of purchases excluding VAT, especially if you can reclaim the VAT as input tax.

Tools to Help Calculate VAT

While the mathematics of removing VAT is straightforward, using tools can save time and eliminate calculation errors. A VAT calculator allows you to instantly remove VAT from any price by entering the gross amount and selecting the applicable VAT rate.

For businesses processing numerous transactions, accounting software with built-in VAT functionality automates these calculations and maintains accurate records for HMRC compliance.

The Difference Between Adding and Removing VAT

Adding VAT and removing VAT require different formulas and are not interchangeable operations. Adding VAT means starting with a net price and calculating the gross price, while removing VAT means starting with a gross price and working backwards to find the net price.

To understand this distinction fully, see our detailed comparison of add VAT vs remove VAT.

Quick Reference

To add 20% VAT: Multiply net price by 1.20
To remove 20% VAT: Divide gross price by 1.20

VAT Rounding and Accuracy

When removing VAT, your calculations may produce amounts with more than two decimal places. HMRC guidance states that VAT should be rounded to the nearest penny, with half pennies rounded down.

For example, if a calculation produces £156.666, this should be rounded to £156.67. If the result is £156.665, this should be rounded down to £156.66.

Maintaining consistent rounding practices across all your VAT calculations ensures accuracy in your records and VAT returns.

Reclaiming VAT on Business Purchases

If you’re VAT-registered, you can generally reclaim VAT on goods and services purchased for business use. To do this, you need to identify the VAT amount on each purchase by removing it from the gross price.

Not all purchases qualify for VAT reclaim. Certain items have restrictions, including:

Business entertainment expenses
Purchase of cars (with some exceptions)
Non-business expenses

For detailed guidance on VAT obligations for your business, see our article on VAT for small businesses in the UK.

When VAT Cannot Be Removed

In some situations, removing VAT doesn’t apply:

Zero-rated items – these have no VAT to remove
VAT-exempt items – no VAT is charged on exempt supplies
Purchases from non-VAT-registered sellers – if the supplier isn’t VAT-registered, no VAT is included in the price

Always check whether VAT has actually been charged before attempting to remove it from a price.

Tips for Accurate VAT Removal

Double-check the VAT rate – ensure you’re using the correct divisor (1.20 for standard rate, 1.05 for reduced rate)
Verify the price includes VAT – confirm that the amount you’re working with is actually VAT-inclusive
Use a calculator for accuracy – manual calculations can lead to errors, especially with complex figures
Keep proper records – document your VAT calculations for HMRC compliance
Round correctly – follow HMRC rounding guidelines to the nearest penny
Cross-check your work – verify calculations by adding VAT back to see if you reach the original gross amount

Common Mistakes When Removing VAT

Subtracting 20% Instead of Dividing

As explained earlier, this is the most common error and produces incorrect results. Always use division, not subtraction.

Using the Wrong VAT Rate

Assuming all items are at the standard 20% rate can lead to errors. Always verify the applicable rate, especially for items that may be reduced-rated or zero-rated.

Forgetting to Separate VAT on Mixed-Rate Invoices

If an invoice contains items at different VAT rates, you must calculate each portion separately. You cannot apply a single VAT rate to the entire invoice total.

Not Keeping Adequate Records

HMRC requires businesses to maintain proper records of all VAT calculations. Failing to document how you removed VAT from prices can cause problems during inspections or audits.

Frequently Asked Questions

How do I remove 20% VAT from a price?

To remove 20% VAT from a gross price, divide the price by 1.20. For example, £240 ÷ 1.20 = £200 (net price). The VAT amount is £240 – £200 = £40. You cannot simply subtract 20% as this produces an incorrect result.

What’s the quickest way to work out VAT from a total?

The quickest method is to divide the VAT-inclusive price by 1.20 for standard rate VAT, or by 1.05 for reduced rate VAT. Using a VAT calculator is even faster and eliminates calculation errors.

Can I deduct VAT from all my business purchases?

Only if you’re VAT-registered. Once registered, you can generally reclaim VAT on goods and services purchased for business purposes, with some exceptions such as business entertainment and certain vehicle purchases. To learn more about VAT calculations, see how to calculate VAT in the UK.

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

Because VAT is calculated as 20% of the net price, not the gross price. When you add 20% VAT to £100, you get £120. But 20% of £120 is £24, not £20. The correct method is to divide by 1.20, which reverses the original VAT addition.

Do I need to remove VAT for my tax return?

Yes, if you’re VAT-registered, your VAT return requires you to report net sales and purchases separately from the VAT amounts. If your records show VAT-inclusive figures, you must remove the VAT to complete your return accurately. Incorrect VAT returns can result in penalties from HMRC.

Summary

Removing VAT from a price is an essential skill for VAT-registered businesses in the UK. By using the correct formula—dividing the gross price by 1.20 for standard rate VAT—you can accurately identify the net amount and VAT component of any transaction.

Whether you’re processing supplier invoices, completing VAT returns, or maintaining financial records, understanding how to properly deduct VAT ensures HMRC compliance and accurate business accounting. Remember that this calculation is different from adding VAT, and using the wrong method will produce incorrect results.

For consistent accuracy across all your VAT calculations, consider using digital tools alongside your understanding of the principles. This combination of knowledge and practical tools will help you manage VAT obligations efficiently.

Disclaimer: This content is for informational purposes only and does not constitute financial or tax advice. VAT rules and rates can change. For specific guidance relating to your business circumstances, consult HMRC directly or seek advice from a qualified accountant or tax professional.