VAT is everywhere, and its arithmetic trips up even experienced bookkeepers. The key distinction — net vs gross, and which direction you're calculating — makes every VAT question solvable.
Net, gross and the tax slice
The net price is the value before tax; the gross includes it. Adding VAT is multiplication (net × (1 + rate)); removing it is division (gross ÷ (1 + rate)). Getting the direction right is the whole game.
The headline-rate illusion
A 20% VAT rate doesn't mean VAT is 20% of what you pay — it's 20% of the pre-tax price, which works out to only 16.7% of the total. Confusing the two is the most common VAT mistake.
VAT in business
For registered businesses, VAT is a pass-through: output VAT on sales is offset against input VAT on purchases, and only the difference is paid. Separating net amounts from tax on every invoice is what makes that reconciliation possible.
Frequently asked questions
Multiply the net price by (1 + rate). For 20% VAT on a $100 net price: $100 × 1.2 = $120, with $20 of VAT.
Divide the gross total by (1 + rate). For a $120 total at 20%: $120 ÷ 1.2 = $100 net, with $20 embedded VAT.
Because the tax is calculated on the net price, not the gross. 20% VAT equals 16.7% of a gross total — the rate as a proportion of the final price is always lower.