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To add VAT to a net price, multiply by 1 + rate. To recover the net price from a VAT-inclusive total, divide by 1 + rate. To extract VAT from that total, use rate ÷ (1 + rate)—not the VAT rate applied directly to the gross amount. For example, at 20%, VAT is one-sixth of a VAT-inclusive price.
These calculations answer the arithmetic question, not which VAT rate applies or whether a seller must quote an inclusive price. The examples below use UK guidance; rates and display rules depend on the jurisdiction, transaction, and applicable terms.
How to calculate prices with and without VAT
Let r be the VAT rate expressed as a decimal, N the VAT-exclusive (net) price, and G the VAT-inclusive (gross) price.
| What you need | Calculation | Example at 20% |
|---|---|---|
| Add VAT to a net amount | G = N × (1 + r) |
£60 × 1.2 = £72 |
| Recover net from a gross amount | N = G ÷ (1 + r) |
£180 ÷ 1.2 = £150 |
| Find VAT included in a gross amount | VAT = G × r ÷ (1 + r) |
£180 × 0.2 ÷ 1.2 = £30 |
HM Revenue & Customs (HMRC) states that to calculate a price including the UK standard rate, described as currently 20% on its guidance page when accessed in 2026, multiply the price excluding VAT by 1.2. Its example for the 5% reduced rate uses 1.05 to add VAT and division by 1.05 to reverse it. Rates can change and do not apply to every supply; determine the applicable treatment separately. HMRC: Charging VAT.
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Why multiplying gross by the rate is wrong
The rate is a percentage of the net amount. Applying it directly to gross instead calculates a percentage of a different base. If a price is £120 gross at 20%, the net is £120 ÷ 1.2 = £100, so VAT is £20. The incorrect calculation £120 × 0.2 returns £24.
For a single-rate amount, the VAT fraction of the gross is r ÷ (1 + r). At 20%, that is 0.2 ÷ 1.2 = 1/6, not one-fifth. HMRC Notice 700 describes using this VAT fraction for inclusive prices. HMRC: VAT guide (VAT Notice 700).
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How much VAT is included in a price?
First establish that the displayed amount is VAT-inclusive and identify the applicable rate. Then multiply the gross amount by the VAT fraction for that rate. For example, if a single-rate item costs £72 gross at 20%, its VAT component is £72 × 1/6 = £12, and its net amount is £60.
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This extraction works for a single rate applied to the whole amount. It does not establish the rate that legally applies, and it is not a safe shortcut for an undifferentiated basket containing supplies with different VAT liabilities.
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Make the price basis explicit in checkout software
A stored value such as 100 is not enough information to calculate or display a price reliably. The system needs to know whether it is net or gross, which currency it uses, and what tax treatment applies. Treat this as an engineering design recommendation, not as a software architecture prescribed by HMRC.
- Represent the amount’s basis explicitly in field names or types, such as net amount versus gross amount.
- Keep the currency and applicable tax treatment alongside the amount; do not infer them from a formatted display string.
- Use the corresponding formula for the input basis, and make the result’s basis explicit as well.
- Test both directions: at 20%, net 100 should produce gross 120; gross 120 should produce net 100 and VAT 20.
- Document the rounding policy and verify it for the relevant jurisdiction, transaction, payment provider, and accounting system. The cited guidance does not establish one universal rule for rounding per line versus at basket total.
What should a price display show?
The calculation basis and the display obligation are separate questions. HMRC says VAT is already included in shop prices, that advertisements aimed at the general public show VAT-inclusive prices, and that listings aimed at both businesses and consumers may show both. Business-only listings do not usually include VAT. These are UK guidance points, not universal rules for every market or sale. HMRC: Where you see VAT.
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A label such as “ex VAT” or “including VAT” can clarify a display, but it does not replace applicable law or the parties’ agreement. HMRC’s guidance on mistakes in charging VAT says the appropriate charging basis depends on the precise contract terms; an amount mistakenly charged can also affect the VAT due, including where a trader intended to quote an exclusive amount. HMRC: Mistakes in charging VAT.
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How to handle a basket with different VAT liabilities
Do not apply one rate to an entire basket just because checkout presents one total. Identify the supplies and their applicable VAT treatment, then calculate each relevant portion under the appropriate rules. HMRC Notice 700 gives examples allocating a combined amount across standard-rated and zero-rated supplies, and applying the VAT fraction only to the standard-rated portion. HMRC: VAT guide (VAT Notice 700).
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For implementation, preserve enough line-level information to separate supplies with different liabilities and to explain the resulting calculation on invoices and records. A single-rate formula can still be used on a portion that genuinely has one rate; it should not silently stand in for the allocation step.
Choosing an implementation approach
For a real checkout, evaluate whether the implementation can handle the requirements your sales create rather than choosing solely by the headline calculation:
- Supported jurisdictions, VAT rates, and tax treatments.
- Whether the checkout receives net or gross input and how that basis is represented.
- Whether mixed-rate baskets can be separated or apportioned.
- Calculation and rounding behavior, including how it aligns with payment and accounting systems.
- Invoice and audit output that makes the amounts and their basis traceable.
- Integration with checkout and accounting workflows.
A UK Government Digital Marketplace platform specification describes tax-provider integrations as one possible implementation path, but it is not a current endorsement or a determination of which provider fits a particular checkout. UK Government Digital Marketplace: Platform Features List.
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