What is VAT and How is it Calculated?

What is VAT?

VAT — Value Added Tax — is a consumption tax applied to goods and services at each stage of the supply chain, from manufacturer to retailer to end consumer. It is widely used across the UK, the European Union and many other jurisdictions, although rates, exemptions and administrative rules differ.

Unlike a simple sales tax applied only at the point of final sale, VAT is collected at every stage of production and sale. Each business in the chain charges VAT on its sales and can reclaim the VAT it has paid on its purchases. The net effect is that the tax burden falls entirely on the end consumer, while businesses act as collection agents for the government.

Australia, India, New Zealand and Singapore use taxes called GST. Canada combines a federal GST with HST in participating provinces and separate provincial systems elsewhere. The arithmetic may be similar, but scope and legal treatment are jurisdiction-specific.

How to Calculate VAT

There are two common VAT calculations — adding VAT to a net price, and removing VAT from a gross price.

Adding VAT to a Net Price

To add VAT to a net (excluding VAT) price, multiply by (1 + VAT rate ÷ 100). For UK standard VAT at 20%: a net price of £100 becomes £120 gross. The formula is £100 × 1.20 = £120. The VAT amount is £20.

For Australia's GST at 10%: a net price of A$200 becomes A$220 gross (A$200 × 1.10 = A$220). The GST amount is A$20.

Removing VAT from a Gross Price

To remove VAT from a gross (VAT-inclusive) price, divide by (1 + VAT rate ÷ 100). For UK VAT at 20%: a gross price of £120 has a net price of £100 (£120 ÷ 1.20 = £100). The VAT amount is £20.

This is called a reverse VAT calculation and is commonly used when you have a VAT-inclusive receipt and need to find the net amount for accounting purposes.

VAT Inclusive vs VAT Exclusive

A VAT exclusive price is the net price — before VAT is added. This is typically how businesses quote prices to other VAT-registered businesses, who can reclaim the VAT. A VAT inclusive price is the gross price — with VAT already included. This is how prices are displayed to consumers in shops and online.

In the UK, consumer prices must by law be displayed inclusive of VAT. Business-to-business quotes are often shown exclusive of VAT, with the VAT amount listed separately on the invoice. Always check whether a quoted price includes or excludes VAT before comparing — the difference at 20% is significant.

VAT Rates by Country

VAT and GST rates vary significantly by country and often by product category within a country.

United Kingdom

The UK standard VAT rate is 20%. Reduced 5% and zero 0% rates apply only to qualifying supplies. From 25 June 2026 to 1 September 2026 inclusive, a temporary 5% rate applies to specified children's meals, children's admission tickets and certain family attractions. Businesses should verify the current registration threshold and the treatment of each supply with HMRC.

Australia

Australia's GST rate is 10%, administered by the Australian Tax Office (ATO). Most goods and services are taxable at 10%. Some supplies are GST-free or input taxed, and registration thresholds or exceptions depend on the entity and activity. Check current ATO guidance before relying on a rate or threshold.

Canada

Canada has a federal GST of 5%. Participating provinces use Harmonised Sales Tax (HST), currently 13%, 14% or 15% depending on the province, while other provinces may apply separate provincial sales tax. Quebec has its own QST system. Always check the rate for the province and the place-of-supply rules before calculating tax.

India

India rationalised its GST structure from 22 September 2025. The broad reference structure now uses a 5% merit rate and an 18% standard rate, with a 40% special demerit rate for selected supplies; nil, exempt and category-specific treatments also remain. The correct rate depends on the exact goods or services, so use current GST Council and tax-authority guidance rather than an old four-slab table.

Singapore

Singapore's prevailing GST rate is 9%, administered by the Inland Revenue Authority of Singapore (IRAS). Registration, exemption and overseas-vendor rules depend on the business and transaction, so current IRAS guidance should be checked.

UAE

The UAE introduced VAT at 5% in January 2018, administered by the Federal Tax Authority (FTA). It was the first consumption tax of its kind in the Gulf region. Certain supplies are zero-rated including healthcare, education, international transport and the first supply of residential properties.

European Union

EU member states each set their own VAT rates within EU minimum guidelines. Germany applies 19% standard and 7% reduced. France applies 20% standard and 5.5% or 10% reduced. Italy applies 22% standard and 10% reduced. Spain applies 21% standard and 10% reduced. Ireland applies 23% standard with reduced rates of 13.5% and 9%. The EU requires a minimum standard rate of 15%.

Does the US Have VAT?

No — the United States does not have a federal VAT or GST. Instead, the US uses a retail sales tax system applied only at the point of final sale to the consumer, administered at the state and local level rather than federally. Sales tax rates vary by state from 0% (in states with no sales tax such as Oregon, Montana, New Hampshire and Delaware) to over 10% in some local jurisdictions. Because there is no single US rate, there is no equivalent VAT preset for US sales tax in our calculator — use the custom rate field and enter the relevant rate for your state.

VAT Registration for Businesses

In the UK, compulsory VAT registration depends on taxable turnover measured against the current HMRC threshold. Once registered, a business generally charges output VAT on taxable sales and may reclaim qualifying input VAT on business purchases. Always check the current threshold, exceptions and filing rules with HMRC.

Voluntary VAT registration is available for businesses below the threshold and can be beneficial if a business makes significant VAT-able purchases — allowing recovery of input tax. Freelancers and small businesses in the UK, Australia, Canada and other countries should check their local registration thresholds with their tax authority or a qualified accountant.