VAT explained: how to add or remove VAT from a price
Net vs gross prices, the correct formulas to add and remove VAT, why subtracting the rate gives the wrong answer, and how margins interact with VAT.
· 2 min read
Value-added tax (VAT, also GST or sales tax in some countries) is added to the price of most goods and services. Businesses usually think in net prices (excluding VAT) and consumers see gross prices (including VAT).
Adding VAT
Gross = Net × (1 + rate)
100 net with 20% VAT → 100 × 1.20 = 120 gross, of which 20 is VAT.
Removing VAT — the common mistake
Net = Gross ÷ (1 + rate)
120 gross with 20% VAT → 120 ÷ 1.20 = 100 net.
The mistake is to subtract 20% from 120, which gives 96. VAT is 20% of the net price, not of the gross price, so you must divide. The VAT inside a gross price is gross × rate ÷ (1 + rate) — at 20%, that's one sixth of the gross price.
The VAT calculator works in both directions and shows net, VAT and gross.
Rates differ by country and product
Standard rates in many countries are around 20% (France, the United Kingdom and Morocco use 20%, Germany 19%, Spain 21%), and reduced rates apply to food, books, transport or energy depending on local rules. Always check the current official rate for your country and product category.
VAT and your margin
Margins are calculated on net prices, because VAT isn't your revenue — you collect it for the state. To price a product:
- Decide your net selling price from cost with the Profit margin or Markup calculator.
- Add VAT to get the shelf price.
If you start from a “nice” shelf price such as 49.90, remove VAT first to see your real net revenue and margin.
Discounts on VAT-inclusive prices
A 20% discount on a gross price reduces net price and VAT in the same proportion, so you can apply the Discount calculator directly to shelf prices.
This guide explains the arithmetic, not tax law. Rules on who charges VAT, exemptions and reporting vary by country — ask an accountant for your situation.