When 20% isn't 20% - VAT Calculations

A common issue we come across is confusion when working out VAT. When presented with the total price including VAT this can be deceptive. As a tradesman you may have quoted someone a job including VAT, or if you are trying to calculate your predicted margins on a product based on your retail price.

We need to think differently about totals including VAT. Adding VAT is straight forward as we can easily add 20%, for example: John the digger charged £250 plus VAT totalling £300. If John charged £300 including VAT and you deducted 20% it would bring you to £240 not £250. You can see how this would cause a discrepancy in your accounts.

In conclusion deducting 20% from the total will not take you back to the price before VAT. So, the simplest way to calculate the VAT price is to just divide it by 6. (£300 divided by 6 equals £50) giving you the correct VAT amount. If you then minus the £50 from the full amount it brings you to the price before VAT (£250).

All advice and services included in our blogs can be offered by our staff at MJ Baker Accountancy. Please fill in our contact form if you would like tailored advice for your business.

Michelle

MJ Baker Accountancy