How to Deduct & Calculate VAT
The Value Added Tax (VAT) is a charged to consumers in the European Union when they purchase goods or services. Unlike a sales tax, the VAT is charged every time an item changes hands, rather than only when passing from retailer to consumer. Manufacturers charge VAT when selling a product to wholesalers, who in turn charge VAT when selling to retailers. The retailers then charge VAT when making sales to consumers. Goods exported fro Europe are not subject to VAT, but imported goods are subject to it.
Verify the VAT tax rate charged on the item you intend to purchase. By law, the standard VAT tax rate must be at least 15 per cent. Items such as smoking-cessation products, however, are subject to a reduced tax rate of only 5 per cent. For purposes of discussion, assume the VAT tax rate applied is 15 per cent.
Convert the tax-rate percentage to a decimal by dividing it by 100. This will make the number easier to work with. In our example, 15 divided by 100 equals.15.
Add 1 to the decimal version of the VAT tax rate. In this example, the equation would read: 1 plus 15 equals 1.15. This number is the divisor.
Divide the item's gross purchase price by the divisor. If you paid £172.50 for an item , the computation is: £172.50 divided by 1.15 equals 150. This reveals the price of the item, before the VAT tax, is £150.
Check your math by multiplying the item price by the VAT tax rate. If your math is correct, this number added to the item's price will equal the price you paid for the item. To check our example, we would do the following calculation:
(£150)(15%)=£22.50 (This is the amount of VAT tax.)
- VAT tax rate
- Gross purchase price of an item