VAT, GST and sales tax all work the same way on an invoice: a percentage is added to the price. Mistakes happen when the percentage is applied to the wrong amount, when VAT is taken out of a price that did not include it, or when rounding is done at the wrong stage. This guide gives you the formulas for how to calculate VAT on an invoice and how to check the VAT on one you received.

Tax rates and rules depend on your country and on what is being sold. The examples below use 20% because it is the UK standard VAT rate, but always use the rate that applies to you and check with your tax authority when in doubt.

The three formulas you need

Let the net price be the price before tax and the gross price be the price including tax.

1. VAT amount from a net price

VAT = net × rate

2. Gross price from a net price

gross = net × (1 + rate)

3. VAT amount from a gross price

VAT = gross × rate ÷ (1 + rate)

Example at 20%: a net price of £250.00 gives VAT of £50.00 and a gross price of £300.00. Going the other way, £300.00 × 20 ÷ 120 = £50.00. At 20% the VAT inside a gross price is always one sixth of it.

A common mistake is working backwards by multiplying the gross price by 20%. That gives £60.00, which is wrong, because 20% of the gross figure is more than 20% of the net.

What the tax should be calculated on

The taxable amount on an invoice is normally the subtotal after discounts, plus any shipping that is taxable. If a 10% discount is shown, tax should be worked out on the discounted amount.

Example:

  • Subtotal: £1,000.00
  • Discount (10%): −£100.00
  • Taxable amount: £900.00
  • VAT at 20%: £180.00
  • Total: £1,080.00

If the invoice shows VAT of £200.00, it was calculated on the amount before the discount.

Rounding: why a penny can be off

When an invoice has several lines, VAT can be rounded per line or once on the total. The two methods can differ by a penny or a cent.

Three lines of £3.33 at 20%:

  • Per line: £0.666 rounds to £0.67 each, so £2.01 in total.
  • On the total: £9.99 × 20% = £1.998, which rounds to £2.00.

Neither is automatically wrong. What matters is that the invoice is internally consistent and follows the method your tax rules require. A difference of one smallest currency unit is usually rounding. A bigger difference is an error.

How to check the VAT on an invoice you received

  1. Find the taxable amount (the subtotal, less any discount, plus taxable shipping).
  2. Find the rate printed on the invoice.
  3. Multiply the two.
  4. Compare the result with the tax amount shown. Allow for a rounding difference of one unit.
  5. Check that tax plus the taxable amount equals the total due.

You can also let software do it. InvoiceInspect multiplies the taxable amount by the printed rate and flags a tax line that does not match, along with the expected and actual amounts.

Other things worth checking

  • A VAT or tax ID. Invoices from VAT-registered suppliers normally show one. A missing ID is worth a question, not an accusation.
  • Zero-rated or exempt lines. If an invoice applies 20% to something your supplier said was exempt, ask why.
  • One rate applied to everything. Mixed invoices sometimes need more than one rate.

For the rest of the arithmetic, see our 10-step checklist for checking an invoice.