VAT Calculator

What is VAT?

Value-added tax is a consumption tax charged at every stage where a product or service gains value, from raw materials through manufacturing and wholesale to the final retail sale. Each business in the chain charges VAT on its sales (output tax) and deducts the VAT it paid on its own purchases (input tax), remitting only the difference to the government. The full burden ends up on the final consumer, while the tax is collected in installments along the way.

More than 170 countries use a VAT or its close relative, the goods and services tax (GST), including every member of the European Union, the United Kingdom, Canada (as GST/HST), Australia, India, China, Japan (consumption tax) and most of Latin America and Africa. The United States is the major exception: it has no national VAT, and states and cities rely on retail sales taxes instead.

Rates vary widely. The EU requires a standard rate of at least 15%, and most member states charge around 20% to 25%, with Hungary at 27% the highest. Many countries apply reduced rates to necessities such as food, medicine, books and public transport, and exempt or zero-rate items like exports, healthcare and financial services. In the countries that use it, VAT often supplies a fifth or more of total tax revenue.

Businesses usually must register for VAT once their sales pass a threshold, file periodic returns, and keep invoices that show the VAT charged. Prices shown to consumers in most VAT countries include the tax, which is why removing VAT from a gross price is such a common calculation.

Gross = Net × (1 + rate), VAT = Gross − Net

Net

price before VAT

Gross

VAT-inclusive price the buyer pays

rate

VAT rate as a decimal

To remove VAT from a gross price, divide by (1 + rate). Subtracting the rate's percentage from the gross price gives the wrong answer: £120 including 20% VAT is £100 net, not £96.

Simplified Example of the Process of VAT

Follow a wooden table through a supply chain in a country with a 10% VAT. Each business charges VAT on its selling price and reclaims the VAT it paid to its supplier, so it remits tax only on the value it added.

• A sawmill sells lumber to a furniture maker for $100 plus $10 VAT. The sawmill remits $10.
• The furniture maker builds a table and sells it to a retailer for $250 plus $25 VAT. It reclaims the $10 it paid and remits $15, which is 10% of the $150 of value it added.
• The retailer sells the table to a customer for $400 plus $40 VAT. It reclaims $25 and remits $15, which is 10% of its $150 markup.
• The customer pays $440 and cannot reclaim anything. The government has received $10 + $15 + $15 = $40 in total, exactly 10% of the final price, collected in three parts.

VAT vs. Sales Tax

Both taxes are ultimately paid by consumers, and in theory, a 10% VAT and a 10% retail sales tax raise the same revenue from the same final sale. The difference is in how and when the tax is collected.

A sales tax is charged once, at the point of retail sale, and only the retailer deals with it. Businesses buying goods for resale or as manufacturing inputs typically present exemption certificates, but the system is imperfect: some business purchases end up taxed, so tax can stack on tax and hide in prices. In the US, sales tax rates and rules are set by states, counties and cities, more than 10,000 jurisdictions in all, and the tax is usually added at the register rather than included in the shelf price.

A VAT is collected in pieces at every stage. Because each business must document the VAT it paid to claim a credit, the invoices create a paper trail that makes evasion harder; a retailer that underreports sales loses only its own share, and its suppliers have already remitted theirs. The trade-off is more paperwork for every business in the chain, not just retailers, and refunds to exporters and businesses with more input VAT than output VAT.

VAT is also easier to apply at a high rate. Sales taxes above about 10% tend to encourage evasion and mis-classification, which is one reason VAT countries can sustain rates of 20% or more.

Frequently asked questions

Sources

• European Commission – Taxation and Customs Union
• GOV.UK – VAT rates
• OECD