VAT (value added tax) trips people up in one specific way: removing it. Adding VAT is straightforward multiplication, but going from a tax-inclusive price back to the original is a division — not a subtraction. Here's how to do both correctly.
What is VAT?
VAT is a percentage-based consumption tax added to the price of goods and services in the UK, EU, and many other countries. The pre-tax amount is called the net; the tax-inclusive amount is the gross. (US sales tax works the same way mathematically — just substitute your local rate.)
How to add VAT
Multiply the net price by one plus the rate as a decimal. At a 20% rate, multiply by 1.20. So £100 net becomes £100 × 1.20 = £120 gross, of which £20 is VAT.
| Net | Rate | VAT | Gross |
|---|---|---|---|
| £100 | 5% | £5.00 | £105.00 |
| £100 | 10% | £10.00 | £110.00 |
| £100 | 20% | £20.00 | £120.00 |
How to remove VAT (the part people get wrong)
To find the net price from a gross (tax-inclusive) price, divide by one plus the rate — do not subtract the percentage. A £120 price that includes 20% VAT has a net of £120 ÷ 1.20 = £100, and £20 of VAT.
Subtracting 20% gives the wrong answer: £120 − 20% = £96, which is too low. That's because the 20% VAT was charged on the £100 net, not on the £120 gross, so 20% of the gross is larger than the VAT actually included.
VAT vs sales tax
VAT is collected at each stage of the supply chain but ultimately borne by the consumer; US sales tax is collected once at the point of sale. For everyday "how much tax is on this price" math, the calculation is identical — enter your rate and you're done. Rates and rules vary by country and product, so treat results as estimates and check official rates for filings. If you sell products, pair this with margin vs markup when setting prices.