Understanding VAT: Value Added Tax Explained
Value Added Tax, or VAT, is a consumption tax levied on goods and services at each stage of production and distribution, from the manufacturer to the final consumer. It is one of the most widely used forms of taxation in the world, applied in over 160 countries. Unlike a single-stage sales tax that is charged only at the final point of sale, VAT is collected incrementally — each business in the supply chain charges VAT on its sales and reclaims VAT it has paid on its inputs, with only the final consumer bearing the full burden.
Adding VAT to a Price
To add VAT to a net (exclusive) price, multiply the net amount by (1 + VAT rate / 100). For example, at 20% VAT, a $100 item becomes $120. The VAT amount is simply the net amount multiplied by the rate: $100 × 0.20 = $20. This is straightforward, and the calculator above does it instantly for any amount and rate.
Removing VAT from a Gross Price
When you have a VAT-inclusive (gross) price and need to find the net amount, you cannot simply subtract the rate percentage — this is a common mistake. The correct formula is: Net = Gross ÷ (1 + VAT rate / 100). At 20% VAT, the net amount of a $120 price is $120 ÷ 1.20 = $100. The VAT portion is Gross − Net = $120 − $100 = $20. Dividing by 1.2 gives the right answer; subtracting 20% from the gross ($120 × 0.20 = $24) does not.
VAT Rates Around the World
VAT rates vary significantly by country. Hungary has one of the highest standard rates at 27%. The EU average is around 21%. The UK charges 20% on most goods, with 5% on some domestic energy and 0% on food and children's clothing. Australia's GST (equivalent) is 10%. The US does not have a federal VAT; instead it uses state-level sales taxes. Many countries apply reduced rates to essential items like food, medicine, and books to make the tax less regressive.
VAT for Businesses
If you are VAT-registered, you must charge VAT on your sales (output tax) and can reclaim VAT on your purchases (input tax). You pay only the net difference to the tax authority. This means VAT is ultimately borne by the end consumer and is tax-neutral for most businesses — except for the administrative burden of recording and filing. Small businesses below the registration threshold (£90,000 in the UK, for example) are not required to register and therefore do not charge VAT, which can make them price-competitive against larger VAT-registered competitors on consumer sales.
This calculator is for general estimates only. Consult a tax professional for advice specific to your situation.