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 one of the most widely used tax systems in the world, applied in the UK, all EU member states, and over 160 countries globally.

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.

In Australia, Canada, India, New Zealand and Singapore, the same mechanism is used but the tax is called GST — Goods and Services Tax. The calculation method is identical.

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%, set by HMRC. A reduced rate of 5% applies to domestic fuel and power, children's car seats, sanitary products and some energy-saving materials. A zero rate (0%) applies to most food, children's clothing, books, newspapers, magazines and public transport. Businesses must register for VAT if their taxable turnover exceeds the VAT registration threshold (£90,000 as of 2024-25).

Australia

Australia's GST rate is 10%, administered by the Australian Tax Office (ATO). Most goods and services are taxable at 10%. Exemptions include basic food, medical and health services, education, and financial supplies. Businesses must register for GST if their annual turnover exceeds A$75,000.

Canada

Canada has a federal GST of 5%. Most provinces add their own provincial sales tax (PST) on top, creating a Harmonised Sales Tax (HST) in some provinces. Ontario and several Atlantic provinces have an HST of 13-15%. British Columbia, Saskatchewan and Manitoba have separate provincial taxes. Quebec has its own QST system. When calculating total sales tax in Canada, always check the combined federal and provincial rate for the relevant province.

India

India's GST system has four main rates: 5%, 12%, 18% and 28%, depending on the category of goods or services. Essential goods attract lower rates or zero GST. Standard goods and services typically attract 18%. Luxury goods and sin goods attract 28%. India's GST replaced a complex patchwork of state and central taxes when it was introduced in 2017 and is administered by the GST Council.

Singapore

Singapore's GST rate is 9% from 2024, administered by the Inland Revenue Authority of Singapore (IRAS). The rate increased from 8% in January 2024 as part of a planned two-stage increase. Businesses with annual taxable turnover exceeding S$1 million must register for GST.

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, businesses must register for VAT if their taxable turnover in any 12-month period exceeds the VAT threshold (£90,000 for 2024-25). Once registered, businesses charge VAT on their sales (output tax) and can reclaim VAT paid on business purchases (input tax). The net amount — output tax minus input tax — is paid to HMRC, typically quarterly through a VAT return.

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.