Guide for business · updated 12 August 2026
How to work out VAT and the net price in reverse
The reverse VAT calculation is one of the most common errors in small businesses. The mistake is always the same: subtracting the rate straight from the gross price. Here's how to do it right – and how to check that it came out right.
The mistake that recurs every week
The receipt says £120.00. You need the net price for your accounts. The temptation is to work out
120 × 0.80, i.e. to subtract 20%. The result would be £96.00 – and that's wrong by four pounds. The reason
is which number the percentage is taken from. VAT is worked out on the net price, not the gross. When the net price is
£100, the tax is £20 and the gross is £120. So the tax as a share of the gross price is only 16.67% – not 20%.
The correct formula: divide, don't subtract
net price = gross price / (1 + rate / 100)
At the standard rate the divisor is 1.20, at the reduced rate 1.05, and at the zero rate 1.00.
| Rate | Divisor | Net price | VAT |
|---|---|---|---|
| 20% | 1.20 | £416.67 | £83.33 |
| 5% | 1.05 | £476.19 | £23.81 |
| 0% | 1.00 | £500.00 | £0.00 |
The check is easy: multiply the net price you got back by the same factor. If you end up at the original gross price, the calculation was right.
The tax as a share of the gross price
Sometimes you need directly the percentage that gives the tax amount from the gross price. It's worked out with the
formula rate / (100 + rate):
- 20% → the tax share of the gross is 16.6667%
- 5% → 4.7619%
- 0% → 0%
These figures are used in till systems, for example. Round only the final result, not the factor – otherwise penny errors compound on a multi-line calculation.
Which rate applies, and when
The VAT rate is determined by what's being supplied and, for a rate change, by the tax point – the date of supply, not necessarily the invoice date or the payment date. Most goods and services are standard-rated at 20%. Domestic fuel and power and a few other supplies are reduced-rated at 5%. Most food, books and children's clothing are zero-rated. When you check an old invoice, use the rate that was in force at the time – which is why the older rates stay available in the VAT calculator too.
Margin is worked out from net prices
The last pitfall: if you compare a gross sale price with a net purchase price, the margin looks much better than it is. Convert both to the same form before calculating. You can see the combined effect of margin and a discount in the margin calculator – a 10% discount can eat almost a quarter of the margin.
This guide is general information, not tax advice. The scope of the rates and the registration thresholds change. Check the binding details on GOV.UK and confirm your accounting practices with your accountant.
Example: break a receipt into rate bands for the accounts
A single receipt often has more than one rate. Take a lunch receipt: hot food £28.60 at the standard rate and a soft
drink £3.20 at the standard rate, but a packaged sandwich £4.20 zero-rated. When you want the net prices for your
accounts, each line is divided by its own factor – not the whole total by one. The hot-food line is
28.60 / 1.20 = £23.83 with VAT £4.77; the drink 3.20 / 1.20 = £2.67 with VAT £0.53; the
zero-rated sandwich stays £4.20 with £0 VAT. Only at the end do you add the lines up. If you divided the whole total by
one rate, the tax amount would come out wrong and the reconciliation in the accounts wouldn't balance. The same applies
to reclaiming input VAT: the deductible tax is exactly the amount you worked out from the receipt's net price – not a
percentage taken from the gross price.
The most common questions about the reverse calculation
Can I subtract 20% straight from the gross price?
No. That gives too much tax and too low a net price. Always use the divisor 1.20 – or the tax-in-gross fraction, which at the standard rate is 16.6667% of the gross price.
How do I know which rate applies to a receipt?
The rate depends on the product. Most goods and services are standard-rated at 20%; domestic energy and a few items are reduced-rated at 5%; most food and children's clothing are zero-rated. If in doubt, a VAT receipt breaks down the rate per line – use that and don't guess.