VAT Calculator

A tax collected in instalments along the chain

Value added tax is charged at every stage of production, but each business in the chain reclaims what it paid on its inputs, so the net effect is that each one remits tax only on the value it personally added. A timber merchant, a furniture maker and a retailer each charge VAT and each reclaim VAT, and the total collected by the government equals exactly the VAT on the final retail price. The design is deliberate and rather clever: because every business in the chain has a financial incentive to obtain a valid VAT invoice from its supplier in order to reclaim, the system is substantially self-policing in a way a single-stage sales tax is not.

The fraction that makes it easy

There is a shortcut worth memorising if you deal with a fixed VAT rate regularly. At 20%, the VAT contained in a gross price is exactly one sixth of it — because the gross is 120% of the net, and 20 divided by 120 is one sixth. So the VAT in a gross figure of 240 is 40, and the net is 200, calculable in your head with no division by 1.2 required. Each rate has its own fraction: at 5% the VAT is one twenty-first of the gross, and at 17.5% it was seven forty-sevenths, which is why nobody misses that rate. The one-sixth rule for 20% is the one that earns its keep.