How To Calculate Vat
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What VAT is — and how it differs from US sales tax
VAT (Value Added Tax) is the dominant consumption tax across 170+ countries — every EU member state, the UK, most of Asia, Africa, and Latin America. If you’re selling to customers outside the US, you’ll touch it. Get the math right and you stay compliant; get it wrong and you’re personally liable for the uncollected tax. This guide walks through the add-VAT and remove-VAT formulas, rates by country, B2B reverse charge rules, registration thresholds, and the four errors that trigger the most audit headaches.
The two core formulas
VAT is a multi-stage tax: collected at every step in the supply chain, with each business claiming back the VAT they paid on inputs. The end consumer bears the total tax; businesses are just collectors.
Standard rates by country
Contrast with US sales tax: single-stage, collected only at final sale. US businesses don’t claim back sales tax on their inputs.
Reduced and zero rates — what qualifies
Practical implication: as a VAT-registered business, you charge VAT on sales (“output VAT”), claim back VAT on purchases (“input VAT”), and remit the difference to the tax authority. This is why VAT is called a “value-added” tax — you only remit tax on the value you added.
B2B reverse charge — the cross-border rule
Example: £100 net at 20% UK VAT = £20 VAT = £120 gross.
Registration thresholds
Example: £120 gross at 20% = £100 net + £20 VAT.
Digital services and OSS
Common error: people compute “remove VAT” as Gross × 0.80. That’s wrong — you’d get £96, not £100. The correct division is by 1.20.
Invoice requirements
Reduced rates typically apply to essentials: food, books, medicines, public transport, cultural goods. Each country sets its own list — never assume transferability.
4 common VAT errors
When a VAT-registered business in one EU country sells to a VAT-registered business in another EU country:
When to get an accountant vs DIY
The seller charges 0% VAT (not zero-rated, but reverse-charged).
Run the numbers
The buyer “self-accounts” — adds the VAT at their local rate on purchase, then reclaims it on the same return. Net VAT liability: zero. Just a paperwork entry.