The VAT formulas
- Adding VAT: gross = net × (1 + rate). At 20%, multiply by 1.2.
- Removing VAT: net = gross ÷ (1 + rate). At 20%, divide by 1.2; the VAT is gross ÷ 6.
- At 5%: gross = net × 1.05; the VAT inside a gross price is gross ÷ 21.
The mistake to avoid is taking 20% off a VAT-inclusive price: 20% of £120 is £24, but the VAT is only £20.
Worked example
£120 including VAT at 20%
VAT included£20.00
- Net (excluding VAT)
- £100.00
- Gross (including VAT)
- £120.00
- Net
- £100.00
- VAT at 20%
- £20.00
- Gross
- £120.00
A £1,500 invoice for consultancy plus VAT comes to £1,800; you collect £300 on behalf of HMRC and report it on your VAT return.
Rates and thresholds
| Standard rate | 20% |
| Reduced rate | 5% |
| Zero rate | 0% |
| Registration threshold | £90,000 |
| Deregistration threshold | £88,000 |
The standard rate has been 20% since January 2011. The registration threshold rose from £85,000 to £90,000 in April 2024.
Tips for small businesses
- Flat Rate Scheme: if turnover is under £150,000 you can pay a fixed percentage of gross turnover instead of tracking input VAT.
- Cash accounting means you pay VAT only when customers pay you.
- Keep digital records: VAT returns must be filed through Making Tax Digital-compatible software.
- Price for your customers: businesses usually reclaim VAT; consumers can’t, so quote consumers VAT-inclusive prices.