When identifying the amount of VAT charged, it is important to distinguish between VAT inclusive (gross) and VAT exclusive (net) prices. A gross price includes VAT at the prevailing rate.
When a VAT registered business issues an invoice to their customer, they must ensure that they charge the correct rate of VAT. Whilst most businesses in the UK charge VAT at the standard rate of 20%, there are a number of different VAT rates and exemptions to consider. The current rates for goods and services are noted below:
- Standard rate – 20% applies to most goods and services
- Reduced rate – 5% applies to some items including energy bills
- Zero rate – 0% applies to other items such as most foods and children’s clothes
In trade, businesses may display the VAT exclusive price for customers where products are aimed at buyers who can recover any VAT charged. Even when VAT exclusive prices are quoted it is important to ensure that there is a prominent statement indicating the amount or rate of VAT that will apply.
To calculate the net value of in a gross price, divide the gross by 1 + VAT rate. For example, if a pen costs £1.20 to work out a net price at the standard rate of VAT (20%) divide £1.20 by 1.2, giving the net price £1.
Likewise, if you want to calculate a standard rated VAT inclusive price, multiply the net amount by 1.2 and for a reduced rate (5%) price you would multiply by 1.05.
At Wenn Townsend we help a range of clients understand their specific VAT needs. From the day to day bookkeeping of a newly VAT registered business, to large multinationals needing assistance following Brexit. Get in touch to learn more.
Jane Bull, Director of Accounting