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Value Added Tax (VAT) is a consumption-based tax placed on almost all goods and services sold by a business to other businesses and consumers. It’s a consumption tax because consumers pay in full for the VAT while companies do not (they are reimbursed if registered for VAT). The amount paid is determined by a set percentage which varies depending on the country – as of 2023, it is 20% in the UK and 21% in Europe.

Companies that earn more than the annual turnover threshold of £85,000 in the UK have to register for VAT, although companies below this limit are also welcome to register even though it’s not mandatory.

When you have registered for VAT as a business, you don’t ultimately pay VAT on your expenses, as you can claim them back when you submit your VAT return. However, once you’re registered, you do have to add VAT to your own goods and services. Of course, some exemptions and rules affect which goods and services are charged the total VAT percentage of 20%, which ones are exempt, and which ones get a reduced VAT rate. There are also rules around when you can register for VAT and how often you submit a VAT return.

VAT affects the price of certain items because the exemptions and rules outlined above will affect how much VAT is charged on these items. Some will have the full 20% VAT added on, while others will only be charged 5% [link to our blog with VAT exemptions], and others won’t get any VAT added on as they are either zero-rated or exempt.

This is where it can get complicated trying to work out your VAT reclaim charges and how much you should charge for different products. Fortunately, this guide will talk you through the most important facts, and this calculator will help you quickly work out your VAT reclaim.

Procedure to Remove VAT from Price

In some instances, you may need to remove VAT from the cost of your product or service. These include:

• You engage in international trade with different countries. More than 160 countries use VAT, and the charge differs from country to country, with rates ranging from 15%-25%. You need to remove the VAT you have charged in the UK, as exports are usually zero-rated. There are some exceptions that are outlined in VAT Notice 703.
• Your products and services may be excluded from VAT or may be subject to a variety of different rules. For example, your industry may be subject to 20% VAT, but some of the products you sell may be 5%, and others may be 10% or zero-rated. This can get complicated, so a VAT calculator can help you remove, add and calculate VAT across multiple products, services and countries.

It is essential that you accurately remove VAT based on your specific requirements to ensure that your pricing is fair and that you are compliant with tax regulations.

Step-by-step Process to Deduct VAT

When you need to create an invoice that has VAT removed or when you need to assess how much a product or service will cost without VAT for pricing purposes, you will need to deduct the VAT accurately.

Follow these simple steps to work out your VAT and add, deduct or calculate it correctly.

Step #1

Assess your VAT requirements based on what you are selling and where you are selling it. You can use the HMRC website to determine if your products and services are VAT-exempt, zero-rated, reduced rate, or full VAT. Then you will apply the formula outlined in Step 2 below to work out your VAT-exclusive and inclusive pricing.

Step #2

To work out how much VAT to add to an item, simply follow this basic formula:

The cost-inclusive price = the gross/net price of the product multiplied by (100% x the percentage of VAT you should charge).

For example, if your net or gross product price is £5 and is subject to 20% VAT, then you would multiply that by (100% + 20%), which is:

£5 x 120% = £6.

If you want to know exactly how much VAT that works out to, especially when you are undertaking more complex equations, then the formula is:

Net/Gross price x VAT % = VAT.

For example, if your net or gross product prices is the same as above, you would then multiply that by 20% to get your total VAT for that item which is:

£5×20% = £1.

Step #3

You can reverse this formula to determine how much VAT you need to remove from an item. You add the rate of VAT to the number 1 and divide the total amount by 1.2 to work out the gross/net amount.

For example:

1 + 20% = 1.2. Divide £6 by 1.2 and you get £5.

Step #4

If you are doing business with foreign countries that require you to add or remove VAT on products you import or export, then you will need to know their VAT rates, as these differ from country to country. The European Commission has a comprehensive list of all the VAT rates for members of the European Union.

Frequently Asked Questions about Removing VAT

Here are some of the most commonly asked questions about VAT and pricing.

Why might a business want to remove VAT?

You would want to remove VAT from a price for several reasons, including:

• Managing your accounts and spreadsheets so you can always see what the net/gross price of a product or service is before VAT is added
• Importing and exporting products to other countries with or without VAT to ensure your pricing is in line with regulations
• To work out if a product or service is correctly priced in accordance with VAT requirements

Is It Always Legal to Remove VAT from a Price?

This is a complex question. You have to show the price of any product and service clearly and this must be inclusive of VAT so consumers don’t get an unexpected surprise when they pay for an item. If an item is being sold to another business that can reclaim VAT or doesn’t have to pay VAT, then you can use the VAT-exclusive pricing, which is entirely legal. So, in short, if you deal with businesses, yes, you can remove VAT from the price as they can claim VAT or may not need to pay VAT, but you cannot do so with consumers unless you clearly show the final price inclusive of VAT on the item.

How Can a Business Factor VAT Into its Pricing Strategy?

Factoring in the cost of a product or service with VAT must be part of your pricing strategy to ensure your company’s pricing is fair and competitive. If your items are too expensive with VAT included, you may lose customers, but if they are too low, you could lose profits. This means you need to work out how to price your services and products precisely in a way that’s beneficial for both you and your customers.

Key Takeaways on Removing VAT from Prices

Removing VAT from pricing is dependent on a variety of different considerations. From imports and exports, dealing with different VAT requirements in different countries, gaining a more accurate picture of your costs, to removing VAT from a product’s final price, clearly understanding all of these aspects can help you stay compliant and ahead of the pricing game.

It is advisable to always check that your VAT calculations are correct using a trusted calculator or a service designed to help your business manage VAT precisely. These tools will give you critical peace of mind while ensuring you stay ahead of VAT regulations and expectations. Also, check the local tax authority or government website regularly to ensure you are always operating with the latest VAT information. These rules can change quickly, so staying ahead of the game is half the battle won.

If you can master your VAT calculations, you can deftly manage your pricing and market strategies, stay compliant with regulations, and keep clean and accurate records that will come in useful every time you complete a VAT return! Use the information in this article to ensure your business charges the correct VAT, stays compliant with all regulations, and leads the way when it comes to squeaky-clean accounting and VAT best practices.