The formula behind VAT is short, but knowing when to add it versus extract it from a price already includes it is where most manual mistakes happen.
Two Formulas, Two Different Situations
Adding VAT to a net price: Net Price × VAT Rate = VAT Amount. Net Price + VAT Amount = Gross Price.
Extracting VAT from a gross price: Gross Price ÷ (1 + VAT Rate) = Net Price. Gross Price − Net Price = VAT Amount.
Worked Example
A $500 service, UK VAT at 20%: $500 × 0.20 = $100 VAT. Gross total = $600.
If instead $600 was already quoted as a VAT-inclusive price: $600 ÷ 1.20 = $500 net, meaning $100 was VAT.
How US Sales Tax Calculation Differs
| Step | VAT (e.g., UK, 20%) | US Sales Tax (e.g., 8%) |
|---|---|---|
| Charged at | Every stage of the supply chain | Only the final retail sale |
| $100 item, tax added | $120.00 | $108.00 |
| Business can reclaim it? | Yes, on business purchases | Generally no |
Free VAT Calculator — Try It, Then Go Pro
Entering the price and rate into a free calculator avoids manually applying the wrong formula for the situation; the Pro version saves rates per client or country for repeat use.
Frequently Asked Questions
Which formula is used more often on invoices?
Adding VAT to a net price is more common for B2B invoicing; extracting VAT comes up more with consumer-facing, VAT-inclusive pricing.
Does the formula change for reduced VAT rates?
No — only the rate itself changes; the formula stays the same regardless of whether it's a standard or reduced rate.
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