When identifying the amount of VAT charged, it is important to distinguish between VAT inclusive and VAT exclusive prices. A VAT inclusive price includes VAT at the prevailing rate.
When a VAT registered business issues an invoice to their customer they must ensure that they charge the correct rate of VAT. Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions to consider. This includes the reduced VAT rate of 5%.
A VAT exclusive price is the price of goods or services before VAT is added. The use of VAT exclusive prices should only be used when the prices are aimed at buyers who can recover any VAT charged, for example ‘trade prices’ for businesses. Even when VAT exclusive prices are quoted it is important to ensure that there is a prominent statement indicating the amount or rate of VAT that will apply.
In order to work out how much VAT is included in a VAT inclusive price you need to divide the price including VAT by 1 + VAT rate. For example, to work out a price excluding the standard rate of VAT (20%) divide the price including VAT by 1.2 and if VAT was charged at 5% then the total is divided by 1.05.
Likewise, if you want to calculate a VAT inclusive price, for a standard rated (20%) transaction, you would multiply the price excluding VAT by 1.2 and for a reduced rate (5%) price you would multiply the price by 1.05.