How to Pull VAT Back Out of an Inclusive Price

The inclusive price already contains the tax

A £60 shelf price at a 20 percent VAT rate is the net plus the tax, so the net is £60 divided by 1.20, which is £50. The VAT is the remaining £10. You can also take one sixth of £60, because 20 divided by 120 is one sixth, and one sixth of £60 is £10. Taking 20 percent of £60 instead gives £12, which overstates the VAT by £2 and leaves a fake net of £48. Calculators King editors recommend dividing by 1.20, or multiplying by 20 over 120, and never subtracting 20 percent from an inclusive price.

The same shape works at 5 percent. A £105 price divides by 1.05 to give a £100 net and £5 of VAT. The VAT share is 5 divided by 105, not 5 percent of £105, which would be £5.25 and £0.25 too high. Zero-rated goods have nothing to pull out: the inclusive price and the net are the same number. Write the rate beside the price before you divide. A calculator that assumes 20 percent will mis-state a 5 percent item by treating £105 as £87.50 net, which is the 20 percent answer and £12.50 wrong.

Adding and subtracting the rate do not cancel

Start from a £50 net, add 20 percent, and you land on £60. Start from that £60 and subtract 20 percent, and you land on £48, which is £2 below the net you began with. The two 20 percents are percentages of different bases, £50 and then £60. Anyone who "reverses" a quote by knocking 20 percent off has donated £2 to a rounding myth. The reverse of times 1.20 is divide by 1.20. We recommend saying that sentence when a colleague subtracts the rate they just added. Keep the unit, the count, and the name of the formula in the same sentence as any figure you copy into a report.

The gap grows with the price. On a £1,200 inclusive figure, subtracting 20 percent removes £240 and leaves £960, but the true net is £1,000 and the true VAT is £200. The mistaken method overstates VAT by £40. On a £12 inclusive coffee the same mistake is only £0.40, which is why it survives in petty cash and then fails on a machine. Use the fraction on the large line and the small line. A £40 error on a single tool is a week of coffees, and it is invisible if every line in the spreadsheet uses the same wrong subtraction.

A long invoice rounds to the penny

Seventeen items at £11.99 inclusive cost £203.83. One sixth of £203.83 is £33.97166, which rounds to £33.97 of VAT, leaving a net of £169.86. Check the other direction: 20 percent of £169.86 is £33.972, which rounds back to £33.97, and £169.86 plus £33.97 returns £203.83. If you round each item's VAT separately you can be a penny away from the total-line VAT. Pick one rounding policy, line by line or on the total, and use it for the whole invoice. We recommend the policy the accounting software already uses, so the blog sum and the ledger match.

A mixed-rate invoice cannot share one fraction. Suppose £60 at 20 percent and £105 at 5 percent sit on the same receipt. The VAT amounts are £10 and £5, so £15 of VAT on a £165 gross, and the combined net is £150. One sixth of £165 is £27.50, which invents £12.50 of VAT. Split the receipt by rate, extract each VAT, then add. A calculator with a single rate box needs two runs for this receipt. Label the runs 20 percent and 5 percent before you add the £10 and the £5.

Discounts before and after the tax

A 10 percent discount on the £50 net is £5, leaving £45, and 20 percent VAT on £45 is £9, so the customer pays £54. A 10 percent discount on the £60 inclusive price is £6, leaving £54. In this particular case the customer pays the same £54, and the VAT is £9 either way. The paths match because the discount is a straight percentage. They stop matching if the discount is a fixed £5 off the inclusive price: £60 minus £5 is £55, the net is £45.83, and the VAT is £9.17. Say whether the voucher hits the net or the gross.

A "£10 off, VAT already included" poster is an inclusive discount. Pull VAT out of the price the customer actually pays, not out of the pre-discount £60. On a £50 inclusive payment the VAT at 20 percent is £8.33 and the net is £41.67. Pulling £10 of VAT out of the old £60 overstates tax by £1.67 and does not describe the sale. We recommend extracting VAT from the tendered total after every discount. Keep the pre-discount gross only as a note of what the saving was. Keep the unit, the count, and the name of the formula in the same sentence as any figure you copy into a report.

Prices quoted the wrong way round

A freelancer who quotes £500 "plus VAT" is quoting a net. The client pays £600 if the rate is 20 percent. A freelancer who quotes £500 "including VAT" is quoting a gross, and the net is £416.67 with £83.33 of VAT. The two quotes differ by £100 on the invoice the client sees, and by £83.33 on the net the freelancer keeps before income tax. The words plus and including do all the work. We recommend reading them before you compare two estimates that both say £500. Keep the unit, the count, and the name of the formula in the same sentence as any figure you copy into a report.

If you are the one quoting, pick the words and then the number. Adding VAT later to an inclusive quote double-counts: £500 inclusive plus another 20 percent becomes £600, with VAT of £100 against a true inclusive VAT of £83.33. The client has been billed £100 too much. Dividing a plus-VAT quote by 1.20 undercharges: the £500 net would be turned into £416.67 by mistake. Write "net £500, VAT £100, gross £600" as three lines. A single number with no label is how the £100 appears. Keep the unit, the count, and the name of the formula in the same sentence as any figure you copy into a report.

What to hand to a bookkeeper

Hand over the gross, the rate, the net, and the VAT, not the gross alone. For the £60 example the four numbers are £60, 20 percent, £50, and £10. For the mixed receipt they are two rows, £60 at 20 percent and £105 at 5 percent, totalling £165 gross and £15 VAT. A bookkeeper who receives only £165 will guess a rate. The guess of 20 percent creates £27.50 of VAT and a £12.50 error. We recommend a rate column even when every line happens to be standard rated, so a later 5 percent line has somewhere to go.

Keep the till receipt if the penny rounding differed from your mental one sixth. A £0.01 difference on one receipt does not matter. Thirty receipts a day for a year is about 10,000 receipts, and a systematic one-penny bias is £100. Check ten receipts against the divide-by-1.20 method. If all ten are a penny high, the till is using a different rounding rule and the books should follow the till, with a note. The extraction method belongs in the working papers so next year's review does not invent a new fraction.

Open the worksheet

The matching page is the VAT Calculator. It opens with a worked example, names the formula, and keeps the steps next to the result. Use it when you want the arithmetic on your own numbers rather than the argument on this page.