Calculate Your UK VAT

To reverse a VAT calculation (remove VAT from a price that includes VAT):

1. Take the total amount including VAT
2. Divide it by (1 + VAT rate as a decimal)
3. This gives you the price excluding VAT

Formula: Net Amount = Gross Amount ÷ (1 + VAT%)

Example: For a £120 price including 20% VAT:
£120 ÷ 1.2 = £100 (price excluding VAT)

The VAT amount can then be calculated by subtracting the net amount from the gross amount:
£120 – £100 = £20 (VAT amount)

To calculate 20% VAT backwards (removing VAT from a price that includes it):

1. Take the price including VAT
2. Divide by 1.2 (which is 1 + 20%)

Formula: Net Amount = Gross Amount ÷ 1.2

Example: For a £240 price including 20% VAT:
£240 ÷ 1.2 = £200 (price excluding VAT)

To find the VAT amount itself:
£240 – £200 = £40 (VAT amount)

Alternatively, you can calculate the VAT directly as:
£240 × (20 ÷ 120) = £40

To reverse 5% VAT (remove it from a price that includes VAT):

1. Take the price including 5% VAT
2. Divide by 1.05 (which is 1 + 5%)

Formula: Net Amount = Gross Amount ÷ 1.05

Example: For a £105 price including 5% VAT:
£105 ÷ 1.05 = £100 (price excluding VAT)

To find the VAT amount itself:
£105 – £100 = £5 (VAT amount)

The same principle applies to any VAT rate – simply divide by (1 + the VAT rate as a decimal).

The VAT reverse charge method is a tax mechanism that shifts the responsibility for reporting and paying VAT from the supplier to the buyer of goods or services. Under this mechanism:

• The supplier does not charge VAT on their invoice
• Instead, the buyer self-accounts for the VAT, adding it to their own VAT return
• The buyer both pays and reclaims the VAT in the same VAT return (if eligible to reclaim it)

The reverse charge mechanism primarily applies to:

• Cross-border B2B transactions within the EU
• Certain domestic sectors prone to VAT fraud (like construction in the UK)
• Services received from suppliers outside the UK/EU

This mechanism helps prevent VAT fraud and simplifies tax compliance for international transactions.

To calculate VAT backwards in Excel (removing VAT from a price that includes it), you can use any of these formulas:

Method 1: Basic Division Formula

If cell A1 contains the gross amount (including 20% VAT):

• Net Amount (excluding VAT): =A1/1.2
• VAT Amount: =A1-(A1/1.2) or =A1*0.2/1.2

Method 2: Using Named Cells

For greater flexibility with different VAT rates:

• Put the gross amount in cell A1
• Put the VAT rate (e.g., 20%) in cell B1
• Net Amount: =A1/(1+(B1/100))
• VAT Amount: =A1-A1/(1+(B1/100))

Method 3: Creating a Reusable Function

You can create a custom function in VBA for repeated use.

Remember: Always format the cells appropriately for currency values to ensure accurate presentation of results.

When issuing an invoice under the reverse charge mechanism, you should:

1. Don’t charge VAT – Show the net price without adding VAT
2. Include a clear statement – Add text such as “VAT Reverse Charge: Customer to account for VAT at the appropriate rate”
3. Show the VAT amount – While you don’t charge it, you should indicate the amount of VAT that the customer needs to account for
4. Include customer’s VAT number – Display the customer’s VAT registration number
5. Reference the legislation – Include text like “Reverse charge: VAT Act 1994 Section 55A applies”

Example layout:

Subtotal: £1,000.00
VAT: £0.00 (Reverse charge applies – customer to account for £200.00 VAT)
Total: £1,000.00

Note: For construction industry reverse charges in the UK, HMRC requires the statement “Reverse charge: Customer to pay VAT to HMRC” to be clearly displayed on the invoice.

Yes, the reverse charge VAT mechanism is mandatory in specific circumstances defined by tax authorities. It is not optional when it applies to your situation.

Situations where reverse charge VAT is mandatory:

• Most B2B services provided by overseas suppliers to UK businesses
• Most supplies of construction services between VAT-registered businesses in the UK construction industry
• Specific sectors designated by HMRC like telecommunications, broadcasting, and electronic services
• Cross-border transactions of certain goods within the EU

Important: Failing to apply the reverse charge when required is a compliance breach that can result in penalties. If you’re uncertain whether the reverse charge applies to your transaction, consult with a tax professional.

Note that you must be VAT registered to use the reverse charge mechanism. Non-VAT registered businesses receiving services where reverse charge would normally apply must follow different rules.

Several categories of businesses and individuals cannot claim VAT back in the UK:

1. Non-VAT registered businesses – Businesses below the VAT threshold (currently £90,000) that haven’t voluntarily registered
2. Businesses making exempt supplies – Entities that primarily make VAT-exempt supplies (like financial services, education, or healthcare)
3. Businesses using VAT schemes – Some VAT schemes limit what can be reclaimed (e.g., Flat Rate Scheme)
4. Personal purchases – VAT on goods and services purchased for personal use cannot be reclaimed
5. Blocked items – Certain expenses have “blocked” VAT that cannot be reclaimed, including:
   • Entertainment (except staff entertainment)
   • Most motor cars (except those exclusively for business)
   • Goods and services for non-business activities
   • Items covered by the Tour Operators Margin Scheme
   • Business gifts costing over £50 to the same person within a 12-month period
6. Partial exemption limitations – Businesses with both taxable and exempt supplies face restrictions on what they can reclaim

Additionally, there are specific time limits for VAT reclaims, and claims made outside these periods will be rejected.

For tourists: Since January 2021 (post-Brexit), the UK no longer offers VAT refunds for tourists on goods purchased in Great Britain (England, Scotland, and Wales). Tourists can no longer use the VAT Retail Export Scheme that previously allowed them to claim VAT refunds on goods purchased but not consumed in the UK.

For businesses: Foreign businesses not established in the UK can still reclaim UK VAT on business expenses in certain circumstances:

• The foreign business must not be VAT-registered in the UK
• The foreign business must not have a fixed establishment in the UK
• The expenses must be for business purposes
• The expenses must be types that would be eligible for VAT recovery if incurred by a UK business
• Claims must follow the specific procedures set by HMRC

Note for Northern Ireland: Different rules apply in Northern Ireland due to the Northern Ireland Protocol. Tourists can still get VAT refunds on goods purchased in Northern Ireland if they take them outside the UK and EU within 3 months of purchase, but not all retailers offer this service.

Foreign businesses seeking to reclaim UK VAT should use the overseas VAT refund scheme administered by HMRC, which has specific requirements and deadlines.

The 4-year rule for VAT reclaims in the UK refers to the time limit within which businesses must make claims for VAT refunds. There are several aspects to this rule:

For regular VAT claims:

Businesses have up to 4 years from the end of the relevant VAT return period to correct errors or claim input VAT they failed to include on their original VAT return.

For pre-registration expenses:

• Goods: You can reclaim VAT on goods purchased up to 4 years before your VAT registration date, provided you still have them or they were used to make goods you still have
• Services: You can only reclaim VAT on services purchased within 6 months before your VAT registration date

For overpaid output tax:

Under Section 80(1) of the VAT Act, claims to recover VAT that was over-declared as output tax must be made within 4 years of the end of the relevant accounting period.

For bad debt relief:

You can claim VAT back on bad debts (where a customer hasn’t paid) if more than 6 months but less than 4 years and 6 months have passed since the due date for payment.

These time limits are strictly enforced by HMRC, and claims made outside these periods are typically rejected unless there are exceptional circumstances.