Tax Category Tax: calculations, VAT, self-employment tips and more

How to calculate VAT

Value Added Tax, or VAT, is a form of sales tax used in Europe.

The tax varies between three classes of item, depending on their statue of manufacturer and perceived “luxury” status; meaning essential foods are VAT-exempt, but alcohol is not. Determining the precise level of VAT to charge can therefore be tricky but the mechanism behind how to calculate VAT once the VAT rate is known is, thankfully, simple.

Determine the VAT status of the item in question. When an item is not VAT-exempt, meaning no VAT can be charged on it, its will have VAT charged on it at one of three rates. Zero-rated items are items which technically have a VAT rating but you do not pay VAT on them. Reduced rate items are charged VAT at 5%. Standard rate items are charged VAT at 17.5%, rising to 20% in January 2011.

Determine whether the item's price already includes VAT. For those items that do not include VAT, if the item is zero-rated, the VAT on it is zero and you pay only this price. For other items, divide the identified price by ten, to give you 10% of its cost. For reduced rate items, half the value you just calculated, to get 5% of its cost. This is the VAT you will pay on those items.

Halve the 5% cost you just calculated, to get 2.5% of the item's value. Add this to the 5% figure and add the sum of these to the 10% figure you calculated earlier. You have now calculated the 17.5% standard rate of VAT. This is the VAT you will pay on most items.

Divide the total price of the item, for items that are priced inclusive of VAT, by 117.5 (if it is a standard rate item) or by 105 (if it is a reduced rate item). This determines 1% of the item's price. Multiply this figure by 100. This is the price without VAT added. Subtract this price from the total price to calculate VAT charged on the item.


The charging structure of VAT is designed to be simple for people to calculate using mental arithmetic, removing the need to carry a calculator with you. From January 2011, it will be even easier to calculate VAT on standard rate items. Simply take the 10% value you calculated in Step 1 and double it. This will give you the 20% VAT chargeable on standard-rate items.


Determining the rate of VAT charged on items such as food and drink can be tricky. Hot food served in a cafe or restaurant is charged at the standard rate, as is cold food served to be consumed on the premises. Cold food sold for consumption elsewhere is VAT-exempt, however. The HM Revenue & Customs website provides a complete list of which rates are charged on different items.

Things Needed

  • Pen and paper