Removing VAT is not the same as taking 20% off
A gross figure of £120 at 20% VAT is £100 net, not £96. It is the most common mistake in small business paperwork.
The reason is that the 20% was never calculated on £120. It was calculated on £100, the net figure, and then added. So the VAT is a fifth of the smaller number, not a fifth of the bigger one. To go backwards you divide by 1.2. Taking 20% off the gross gives you £96 and leaves you £4 out, which is 4% of the job, and it always lands against whoever made the mistake.
The shortcut worth memorising: at 20%, divide the gross by 6 to get the VAT.£120 divided by 6 is £20 of VAT, leaving £100. That works because one minus one over 1.2 is exactly one sixth. At 5% the divisor is 21.
The UK VAT rates
- Standard, 20%. Most goods and services, and most construction work on commercial property or as a straightforward repair.
- Reduced, 5%. Domestic fuel and power, and some residential conversions and renovations. Converting a house into flats, or bringing a home empty for two years back into use, can qualify. Worth checking before you quote, because it is a 15 point swing.
- Zero rated, 0%. Includes new build residential. Zero rated is not the same as exempt: a zero rated sale still counts toward your turnover for registration and you can still reclaim input VAT on it.
Should you be charging VAT at all?
If you do construction work for a VAT registered customer who is not the end user, the answer is usually no.
Under the domestic reverse charge, the customer accounts for the VAT to HMRC instead of you. You invoice with no VAT and specific wording on the document. Three questions decide it, and the checker beside the calculator walks them: is it construction services within CIS, is the customer VAT registered, and is the customer the end user.
The end user question catches people. A property owner having work done for themselves is an end user, so you charge VAT as normal. A main contractor billing that owner is also dealing with an end user. But a subcontractor billing that main contractor is not, so the reverse charge applies. Same site, different answer depending on where in the chain you sit.
Getting it wrong costs you either way. Charge VAT you should not have and their accountant bounces the invoice and you wait another month. Miss the wording and it comes back for the same reason. The reverse charge invoice tool words it for you.
When you have to register
When your VAT taxable turnover passes the threshold on any rolling twelve month period, not on your financial year.
That rolling part is what catches sole traders out. It is not "did I turn over more than the threshold last year", it is "have I in any twelve months ending now". A good spring can put you over in July on figures that looked fine in April. You can also register voluntarily below the threshold, which is worth doing if most of your customers are VAT registered businesses and you have real input VAT to reclaim.
Rounding, and why the three figures always add up here
VAT is rounded to the penny, half up, once. Not per line and then again at the total.
This calculator works the net out first and takes the VAT as the remainder, so net plus VAT always equals exactly the gross figure you typed. Calculating the VAT independently and subtracting is mathematically defensible and produces documents that are a penny out, and an invoice that does not add up gets queried no matter how correct the rounding was.
Common questions
Why is removing VAT not the same as taking 20% off?
Because the 20% was calculated on the net figure, not the gross one. £120 gross at 20% VAT is £100 net, since £100 plus a fifth of £100 is £120. Taking 20% off £120 gives £96, which is £4 short, roughly 4% of the job.
What is the quick way to work out VAT at 20%?
Divide the gross figure by 6. £120 divided by 6 is £20 of VAT, leaving £100 net, because one minus one over 1.2 is exactly one sixth. At 5% VAT the divisor is 21 instead.
What are the UK VAT rates?
20% standard, covering most goods, services and construction work on commercial property. 5% reduced, covering domestic fuel and power and some residential conversions such as turning a house into flats. 0% zero rated, which covers new build residential.
Is zero rated the same as VAT exempt?
No. A zero rated sale still counts towards your turnover for VAT registration and you can still reclaim the input VAT on it, unlike an exempt sale.
When does the construction domestic reverse charge apply?
When you do construction work within CIS for a VAT registered customer who is not the end user. The customer then accounts for the VAT to HMRC instead of you, and you invoice with no VAT and the required wording. A subcontractor billing a main contractor is not billing the end user, so the reverse charge applies, but a main contractor billing the property owner is billing the end user, so normal VAT applies.
When do I have to register for VAT?
When your VAT taxable turnover passes the threshold in any rolling twelve month period, not your financial year. It is possible to be under the threshold at every year end and still have gone over it partway through, so the test is whether any twelve months ending now has taken you over, not whether last year's total did.
Why do the net, VAT and gross figures always add up on this calculator?
Because the VAT is rounded to the penny once, taken as the remainder after the net figure is worked out, rather than calculated independently and subtracted. That is why the net and VAT always add up to exactly the gross figure you typed.