How to remove VAT from a price, and why subtracting the percentage is wrong

The answer

Net price = gross price ÷ (1 + VAT rate). At 20% that is the gross price divided by 1.2; at 19% divided by 1.19; at 23% divided by 1.23. The VAT itself is what is left over: gross minus net.

Going the other way is the simple direction: gross = net × (1 + rate).

A check you can always run: add VAT back to the answer. If net × (1 + rate) does not return the figure you started with, the removal was wrong.

Why subtracting the percentage fails

The usual shortcut is to take 20% off a price that includes 20% VAT. It feels right and it is wrong, because VAT is calculated on the net price, not on the gross one. The 20% was added on top of the net, so it is a fifth of the net, but it is only a sixth of the total.

Take £1,200 including 20% VAT:

• Correct: 1,200 ÷ 1.2 = £1,000.00, of which £200.00 is VAT.
• Shortcut: 1,200 − 20% = £960.00, which treats £240.00 of the total as VAT.

The shortcut removes £40 too much. It also fails the check: £960 × 1.2 = £1,152, not £1,200.

How wrong is it, exactly?

Write the gross price as G = N × (1 + r), where N is the net price and r is the rate. Subtracting the percentage gives G × (1 − r) = N × (1 + r) × (1 − r) = N × (1 − r²). So the shortcut does not return N; it returns N minus r² of N.

The error as a share of the true net price is therefore the rate multiplied by itself: at 20%, 0.2 × 0.2 = 4%. It always leaves you with too little net and too much VAT, and it grows quickly with the rate. This table uses a gross price of 1,000 in any currency:

VAT rate	Correct net	Net after subtracting the rate	Net understated by	As a share of correct net
5%	952.38	950.00	2.38	0.25%
10%	909.09	900.00	9.09	1.00%
19%	840.34	810.00	30.34	3.61%
20%	833.33	800.00	33.33	4.00%
21%	826.45	790.00	36.45	4.41%
23%	813.01	770.00	43.01	5.29%
25%	800.00	750.00	50.00	6.25%

At a 5% rate the shortcut is nearly harmless, but the error grows with the square of the rate, so a habit that costs 0.25% at 5% costs 4% at 20%.

How much of a price is VAT

Because VAT is a share of the net price, the share of the gross price is smaller, and it has a pattern worth memorising:

VAT rate	VAT as a share of gross	Mental shortcut
5%	4.76%	gross ÷ 21
10%	9.09%	gross ÷ 11
20%	16.67%	gross ÷ 6
25%	20.00%	gross ÷ 5

The pattern is VAT = gross × rate ÷ (1 + rate). At 20%, a £1,200 price contains £1,200 ÷ 6 = £200 of VAT. At 10%, a £330 price contains £330 ÷ 11 = £30. At 25%, a price of 250 contains 250 ÷ 5 = 50. For any other rate, work out the share once and reuse it.

A worked example: pricing on a marketplace

A product sells for €59.90 on a marketplace that displays prices including VAT, in a country with 19% VAT. It costs €22.00 to buy and €4.50 to ship. Fees are left out to keep the arithmetic visible.

	Correct (÷ 1.19)	Shortcut (− 19%)
Net revenue	€50.34	€48.52
VAT	€9.56	€11.38
Profit after product and shipping	€23.84	€22.02
Profit as a share of net revenue	47.4%	45.4%

The shortcut understates net revenue and profit by €1.82 on every sale and overstates the VAT portion of the price by the same amount. Over 200 sales a month that is €364 of margin that the shortcut makes disappear on paper. It makes a profitable product look thinner than it is, and on a thin margin that can be enough to cancel a product that is actually working.

The same logic applies in reverse when you set a price. If you want customers to see €60.00 on the shelf in a 19% country, the net price you receive is 60 ÷ 1.19 = €50.42, not €50 and not 60 less 19%.

Doing it in a spreadsheet

With the rate in cell B1 formatted as a percentage and the price in B2:

Net from gross:   =B2/(1+B1)
VAT in a gross:   =B2-B2/(1+B1)
Gross from net:   =B2*(1+B1)

Keep gross and net in separate, clearly labelled columns. A common spreadsheet error is a column that mixes the two, so that a total adds some figures that include VAT and some that do not.

Rounding

VAT amounts are money, so they are rounded to the cent, and the order in which you round changes the answer. Take three items at €9.99 including 20% VAT.

• Per line: each line is 9.99 ÷ 1.2 = 8.325, which rounds to €8.33 net with €1.66 VAT. Three lines give €24.99 net and €4.98 VAT.
• Per invoice: the total is €29.97, and 29.97 ÷ 1.2 = 24.975, which rounds to €24.98 net with €4.99 VAT.

Both reconcile to €29.97, and they differ by one cent in how it splits between net and VAT. Which method is allowed or required depends on your tax authority, and the accounting software you file with settles it. What matters in practice is to choose the method that applies to you and use it consistently, instead of rounding intermediate figures by hand and adding them up.

Things this arithmetic does not decide

• Which rate applies. The standard rate is not the only one. Reduced and zero rates exist for categories such as food, books and medical supplies, and the rate depends on what you sell and where. The standard rate for a country also changes from time to time, so confirm it with the tax authority rather than from a table of rates you found.
• Whether a price includes VAT. Some marketplaces and shops display gross prices, others net ones, and B2B quotes are usually net. Check before you divide, because dividing a net price by 1.2 is the same mistake in a different place.
• Sales tax. In places where tax is added at the till, such as US sales tax, the displayed price usually does not include it, so there is nothing to extract.
• Registration and filing. Whether you must charge VAT at all depends on where you and your customers are and on how much you sell.

This is arithmetic, not tax advice.

Checklist

• You know whether the price you hold is gross or net.
• You divide by 1 + rate; you do not subtract the rate.
• Adding VAT back returns the starting figure.
• You use the correct rate for the product, not just the standard one.
• Gross and net sit in separate columns.
• You round the way your tax authority expects, once, at the end.

The VAT calculator does both directions at the usual rates and, when you remove VAT, shows the shortcut’s answer next to the correct one so the gap is visible. For the next step, once the price is net, see the margin calculator, which shows margin and markup side by side, and the break-even calculator. The invoice generator builds a document from the same figures.