How VAT works — adding it, removing it and avoiding the classic mistake

Adding VAT to a net price

To add VAT, multiply the net price by (1 + rate). A €100 net price with 21% VAT becomes €100 × 1.21 = €121. The VAT amount is €21.

Removing VAT from a gross price

To find the net price inside a VAT-inclusive amount, divide by (1 + rate), not multiply by (1 − rate). €121 / 1.21 = €100, which is correct. Subtracting 21% instead would give €121 × 0.79 = €95.59 — wrong by over €4.

The reason: the 21% was calculated on the net price, so it represents a smaller share of the gross price. At 21% VAT, the tax is 21/121 ≈ 17.36% of the gross amount. At 20% VAT it is 1/6, or 16.67%.

Standard and reduced rates

Most countries have a standard rate and one or more reduced rates for essentials such as food, books or medicines. Examples of standard rates at the time of writing: Netherlands 21%, Germany 19%, France 20%, Spain 21%, United Kingdom 20%. Rates do change, so check your tax authority before invoicing.

VAT vs. sales tax

VAT is collected at every stage of production; businesses reclaim the VAT they paid on their own purchases, so only the final consumer bears the full tax. Prices shown to consumers in VAT countries normally include it.

US sales tax is charged only once, at the final sale, and is usually added at the checkout rather than included in the shelf price. Rates vary by state, county and city.

Practical tips for small businesses

Always state whether prices are including or excluding VAT. Round VAT per invoice line or per invoice consistently, according to your local rules. Keep the VAT amount on every invoice visible, as most countries require it.