VAT Theory

VAT Formulas & Common Traps – Study Helper

Tap each button to reveal the explanation. Keep a calculator handy and pause after each example to try it yourself.

Quick VAT Summary (20% VAT)

  • Net → VAT: VAT = Net × 20% = Net × 0.20
  • Net → Gross: Gross = Net × 120% = Net × 1.20
  • Gross → Net: Net = Gross ÷ 1.20
  • Gross → VAT: VAT = Gross − Net = Gross − (Gross ÷ 1.20)
  • VAT → Net: Net = VAT ÷ 0.20
  • VAT → Gross: Gross = Net + VAT
  • VAT fraction on gross @20%: VAT = Gross × 1/6

1. Net, VAT and Gross – what’s the difference?

Before any formulas, the language has to be crystal clear. A lot of silly mistakes come from mixing these up.

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  • Net = price before VAT.
  • VAT = the tax amount itself.
  • Gross = total the customer pays = Net + VAT.
Example:
Net = £100, VAT @20% = £20, Gross = £120.
So: Net (£100) + VAT (£20) = Gross (£120).

When reading questions, underline whether they give you net, gross or VAT first. That alone prevents loads of errors.

2. Adding VAT to a net price (Net → Gross)

This is the easy one, but it’s good to nail the habit of using factors (1.20) instead of doing it in two steps.

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Formulas for 20% VAT:

  • VAT = Net × 0.20
  • Gross = Net × 1.20
Example:
Net price = £275.00
VAT = £275.00 × 0.20 = £55.00
Gross = £275.00 × 1.20 = £330.00

In exams/books, if you see “price excluding VAT”, that means it’s the net figure.

3. Removing VAT from a gross price (Gross → Net)

This is where lots of people slip up. Gross already includes the VAT, so we have to “strip it out” properly.

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For 20% VAT:

  • Net = Gross ÷ 1.20
  • VAT = Gross − Net
Example:
Gross = £600.00 (includes VAT)
Net = £600.00 ÷ 1.20 = £500.00
VAT = £600.00 − £500.00 = £100.00

✅ Correct: Net = Gross ÷ 1.20
❌ Wrong: Gross ÷ 1.20 = VAT (this is a common exam trick! It actually gives you the net).

4. When the question gives you the VAT amount first

Sometimes the question only gives the VAT amount and expects you to work backwards to net/gross.

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For 20% VAT:

  • Net = VAT ÷ 0.20 (divide by 20%)
  • Gross = Net + VAT
Example:
VAT = £48.00 at 20%
Net = £48.00 ÷ 0.20 = £240.00
Gross = £240.00 + £48.00 = £288.00

Tip: if VAT is 20%, then VAT is always one fifth of the net. So Net = VAT × 5.

5. VAT fraction shortcut (very useful for till totals)

When all sales are at the same VAT rate, there’s a neat fraction shortcut for working from gross takings.

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At 20% VAT:

  • Gross = 120% = 6/6
  • VAT = 20% = 1/6 of gross

So:

  • VAT = Gross × 1/6
  • Net = Gross − VAT = Gross × 5/6
Example:
Gross takings for the day = £9,000.00, all at 20%.
VAT = £9,000.00 × 1/6 = £1,500.00
Net = £9,000.00 − £1,500.00 = £7,500.00

This is quicker than dividing by 1.20 twice, and it’s a favourite in bookkeeping/VAT questions.

6. Discounts: before VAT or after VAT?

You must read the wording carefully: “discount before VAT” vs “discount off the total”. It changes the answer.

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Discount before VAT (most common in bookkeeping questions):

  1. Start with net goods.
  2. Apply discount to get discounted net.
  3. Calculate VAT on the discounted net.
  4. Add any non-VAT items (e.g. 0% delivery) to get gross total.
Example (before VAT):
Goods net = £520.00, discount 15%, VAT 20%, delivery £25.00 (0%)
Discount = £520.00 × 15% = £78.00
Discounted net goods = £520.00 − £78.00 = £442.00
VAT on goods = £442.00 × 20% = £88.40
Gross total = £442.00 + £88.40 + £25.00 = £555.40

If it says “10% off the total including VAT”, you would take the gross and then knock 10% off at the end. The method is different – always underline what the discount applies to.

7. Partial exemption – how much input VAT can you reclaim?

With both taxable and exempt sales, you can’t always reclaim 100% of the VAT on purchases.

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Basic idea in exam-style questions:

  1. Work out total input VAT on purchases.
  2. Calculate the proportion of sales that are taxable:
    Taxable sales ÷ (Taxable sales + Exempt sales).
  3. Multiply input VAT by that fraction = recoverable VAT.
Example:
Taxable sales = £12,000
Exempt sales = £3,000
Purchases = £4,000 net + VAT 20% = £800 VAT

Proportion taxable = 12,000 ÷ (12,000 + 3,000) = 12,000 ÷ 15,000 = 0.8 (80%)
Recoverable VAT = £800 × 0.8 = £640

The remaining £160 is the non-recoverable part of the VAT because it relates to exempt sales.

8. Margin scheme – VAT only on the profit

For second-hand goods under the margin scheme, VAT is charged on the margin (the profit), not the whole selling price.

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Steps under the 20% margin scheme:

  1. Margin = Selling price − Purchase price.
  2. VAT = Margin × 1/6 (VAT fraction at 20%).
Example:
Buy at £220.00, sell at £310.00 under the margin scheme.
Margin = £310.00 − £220.00 = £90.00
VAT = £90.00 × 1/6 = £15.00

Important: VAT is not £310.00 × 20%. It’s only on the margin.

9. VAT returns – big picture

All these calculations feed into one big idea: how much VAT the business pays to (or gets back from) HMRC.

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VAT return basic formula:

  • Output VAT = VAT you charge on your sales.
  • Input VAT = VAT you’ve paid on your purchases/expenses.
  • VAT payable = Output VAT − Input VAT (after any adjustments, credit notes, bad debt relief etc.).
Example:
Output VAT on sales = £3,850
Input VAT on purchases = £1,430
Bad debt relief = £200 (reduces VAT due)
Credit note issued = £85 VAT (also reduces VAT due)

VAT payable = 3,850 − 1,430 − 200 − 85 = £2,135

If the result is negative, HMRC owes the business a refund. If positive, the business owes HMRC.

10. Common “silly mistakes” and how to avoid them

These are the traps that catch people out repeatedly. If she can spot these, she’ll save loads of marks.

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  • Mixing up net and gross. Always mark them clearly: N, V, G in the margin.
  • Using the wrong formula direction. e.g. trying to use “× 1.20” when going from gross back to net.
  • Thinking gross ÷ 1.20 = VAT. It actually gives the net.
  • Forgetting the discount is before VAT. Apply discounts on the net figure first unless the question clearly says otherwise.
  • Applying VAT to items that are 0% or exempt. Only charge VAT on the items that are actually VATable.

A simple routine whenever she sees a VAT question:
1) Underline whether it’s net / gross / VAT given.
2) Write the correct formula from the summary box.
3) Only then touch the calculator.

Mini VAT Quiz – Check You’ve Got the Basics

Enter your answers as numbers only (no £ sign), to 2 decimal places if needed. Then tap “Check my answers”.

1. Add VAT to a net price

Net price = £120.00, VAT @20%.
Work out the VAT and the gross.

2. Remove VAT from a gross price

Gross price = £360.00, which includes 20% VAT.
Work out the net and the VAT amount.

3. Start from the VAT figure

VAT charged is £18.00 at 20%.
Work out the net and the gross.

4. Use the VAT fraction on gross

A shop only sells goods at 20% VAT. Gross takings for the day are £7,200.00.
Use the VAT fraction (1/6) to work out net sales and VAT.