HOW TO WORK OUT VAT BACKWARDS.

There is one VAT calculation that trips up more people than any other: taking a VAT-inclusive figure and working out how much of it was VAT. It looks like it should be simple subtraction. It is not, and the intuitive approach gives the wrong answer every time.

The mistake almost everyone makes

You have an invoice for £120 including VAT and you want the net figure. The instinct is to subtract 20%:

£120 − 20% = £96  ← wrong

The correct answer is £100 net and £20 VAT. Here is why the shortcut fails: the 20% was calculated on the net amount, not on the gross. Taking 20% off the gross removes 20% of a bigger number, so you take off too much.

Check it forwards to see the problem clearly. If £96 were the net figure, the VAT would be £96 × 0.2 = £19.20, giving a gross of £115.20 — not the £120 you started with. The numbers do not reconcile.

The correct method: divide, do not subtract

To remove VAT you divide the gross amount by 1 plus the VAT rate expressed as a decimal.

Then subtract the net from the gross to get the VAT itself.

Worked example at 20%:
Gross = £354.00
Net = £354.00 ÷ 1.2 = £295.00
VAT = £354.00 − £295.00 = £59.00

Worked example at 5%:
Gross = £210.00
Net = £210.00 ÷ 1.05 = £200.00
VAT = £210.00 − £200.00 = £10.00

If you would rather not do this by hand, our VAT calculator does both directions at 20%, 5%, or any custom rate, and shows the net, VAT, and gross figures together.

The VAT fraction shortcut

At the 20% standard rate there is a shortcut worth memorising: the VAT is one sixth of the gross amount.

£354 ÷ 6 = £59 — the same answer, in one step.

This works because 20% expressed as a fraction of the gross is 20/120, which simplifies to 1/6. The equivalent fraction at the 5% rate is 1/21, which is less convenient but works identically. HMRC refers to these as VAT fractions, and they are the standard way to do the calculation mentally.

Adding VAT: the other direction

Going the other way is more intuitive but worth stating for completeness. Multiply the net amount by 1 plus the rate:

£295 × 1.2 = £354 (20%)
£200 × 1.05 = £210 (5%)

A useful habit: whenever you remove VAT, immediately add it back to confirm you return to the original gross figure. It takes seconds and catches every arithmetic slip.

Rounding, and why invoices sometimes disagree

VAT is calculated to two decimal places, and this is where small discrepancies appear. If you calculate VAT per line item and round each one, then total them, you can end up a penny or two away from calculating VAT on the invoice total.

HMRC permits either approach provided you are consistent, but the totals must be internally consistent on the document itself. If your accounting software and your spreadsheet disagree by a penny, rounding method is almost always the reason — not an error in the rate.

When the simple method does not apply

The divide-by-1.2 rule assumes a straightforward standard-rated supply. Several situations work differently, and applying the simple method to them will give you a wrong answer:

• Flat Rate Scheme. You charge customers the normal rate but pay HMRC a fixed percentage of gross turnover. The VAT you charge and the VAT you owe are different numbers.
• Margin schemes. For second-hand goods, antiques, and similar, VAT is due on your margin rather than the full selling price.
• Domestic reverse charge. Common in construction: the customer accounts for the VAT rather than the supplier, and the invoice shows no VAT charged.
• Partial exemption. If you make both taxable and exempt supplies, only a proportion of input VAT is recoverable.
• Mixed-rate invoices. Items at different rates must be calculated separately, not blended.

These are all normal business situations, not exotic edge cases — and they are exactly where an accountant earns their fee. Nothing here is tax advice; check current HMRC guidance for your circumstances.

Quick reference

Commit the middle row to memory and most day-to-day VAT questions become mental arithmetic.