How to Calculate VAT — A Clear Guide for Businesses and Consumers

Blog › Finance · 5 min read · Published 2026-02-17

Learn how Value Added Tax works, how to add and remove VAT from prices, and understand VAT rates across different countries.

What Is VAT?

Value Added Tax (VAT) is a consumption tax levied at every stage of the supply chain where value is added — from raw materials to the end consumer. Unlike sales tax (used in the US), which is only charged at the final point of sale, VAT is collected incrementally throughout the production process. Businesses collect VAT from customers and can reclaim VAT they've paid to their suppliers, with only the net VAT due to the government.

VAT is used by over 160 countries, including all EU member states, the UK, Australia (as GST), Canada (as GST/HST), and most of Asia, Africa, and South America. The United States is one of the few major economies not to have a national VAT.

How to Add VAT to a Price

To find the VAT-inclusive price from a VAT-exclusive (net) price:

Total = Net Price × (1 + VAT Rate/100)

Example: A product costs £500 (excl. VAT). VAT rate = 20%. Total = £500 × 1.20 = £600. VAT amount = £100.

How to Remove VAT (Reverse VAT Calculation)

To find the net price from a VAT-inclusive price:

Net = Total Price / (1 + VAT Rate/100)

Example: You paid £600 including 20% VAT. Net price = £600 / 1.20 = £500. VAT = £100.

Common mistake: Don't multiply by 80% (or subtract 20%) — this gives the wrong answer. You must divide by 1.20 for 20% VAT.

VAT Rates Around the World

UK: 20% standard, 5% reduced, 0% zero-rated
Germany: 19% standard, 7% reduced
France: 20% standard, 5.5% food, 10% restaurants
Australia (GST): 10% flat rate
Canada (GST): 5% federal, plus provincial HST (up to 15% combined)
Hungary: 27% (EU's highest)
Switzerland: 7.7% standard (one of Europe's lowest)

VAT vs Sales Tax — Key Differences

Collection point: VAT at every stage; sales tax only at final sale
Business recovery: Businesses can reclaim VAT on purchases; not possible with sales tax
Transparency: VAT is usually included in displayed prices in VAT countries; US prices show pre-tax amounts
Administration: VAT requires more recordkeeping but reduces tax evasion through the invoice chain

Zero-Rated vs Exempt

Zero-rated items are taxable at 0% — businesses still charge 0% VAT and can still reclaim input VAT on related purchases. Examples: most food, books, children's clothing (UK). Exempt items have no VAT charged, but businesses cannot reclaim input VAT related to them. Examples: financial services, education, healthcare, residential property rental.