How this is worked out
Adding VAT is straightforward: multiply by the rate and add it. £100 plus 20% VAT is £20 of VAT and £120 to pay.
Removing VAT is where it goes wrong, because it is a division rather than a subtraction:
net = gross ÷ 1.20
Take 20% off £120 and you get £96. The right answer is £100. The £20 of VAT is 20% of the net price but only 16.67% of the gross — which is where the old bookkeeper's shortcut of "divide by 6" comes from, since 1/6 is 16.67%.
At the reduced rate of 5% you divide by 1.05, and the VAT fraction is 1/21. There is no shortcut worth memorising for that one.
The arithmetic is the easy part. Which rate applies is a question of law with a great deal of case law behind it, most famously over whether a Jaffa Cake is a cake (zero-rated) or a chocolate-covered biscuit (standard-rated). It is a cake.
A worked example
- Net price
- £100.00
- VAT at 20%
- £20.00
- Gross price
- £120.00
- Wrong way back (subtract 20%)
- £96.00
- Right way back (divide by 1.20)
- £100.00
- VAT fraction of the gross
- 1/6 (16.67%)
- Registration threshold
- £90,000
Divide by six, not by five
The VAT fraction is the quickest way to get VAT out of a gross price at the standard rate: one sixth of the gross is the VAT. £120 gross contains £20 of VAT. It works because 20% of the net equals 16.67% of the gross, and 16.67% is one sixth.
The reason people reach for "subtract 20%" is that it feels like the reverse of adding 20%, and it is not. Adding 20% multiplies by 1.2; reversing it means dividing by 1.2, which is multiplying by 0.8333 — not by 0.8.
On a single invoice the difference is 4% of the total. On a VAT return over a quarter it is the difference between a reconciliation that balances and one that does not, which is how most people discover the error.
Zero-rated and exempt are not the same thing
To a consumer they look identical: no VAT on the bill either way. To a business they are opposite. A business making zero-rated supplies charges 0% VAT and can still reclaim all the VAT on its own costs. A business making exempt supplies charges nothing and can reclaim nothing.
That is why a bookshop, selling zero-rated books, is better off than an insurance broker selling exempt services — the bookshop recovers VAT on its rent, stock and equipment, and the broker absorbs it.
Zero-rated: most food, books and newspapers, children’s clothes and shoes, public transport, prescription medicines, new residential construction. Exempt: insurance, most financial services, postage stamps, and much education and healthcare. There is no logic connecting the two lists — they are the product of decades of political decisions.
The reduced rate, and what actually qualifies
The 5% rate is narrower than people assume. Domestic fuel and power is the big one, along with children’s car seats, mobility aids for the over-60s, and some energy-saving materials installed in homes.
It does not cover most of what people guess. Home renovations are standard-rated, with a narrow exception for properties empty for two years or more, and for conversions that change the number of dwellings. Repairs are standard-rated regardless of the building.
If your supplier has charged 20% and you believe 5% applies, that is a conversation with the supplier rather than an adjustment you can make yourself — the VAT charged on an invoice is the supplier’s liability and only they can correct it.
Registration, and the threshold cliff
You must register for VAT once your taxable turnover passes £90,000 in any rolling twelve months — not a calendar or financial year, any twelve months. You can register voluntarily below it.
For a business selling to VAT-registered customers, voluntary registration is usually worth it: your customers reclaim the VAT you charge, and you reclaim the VAT on your costs. For a business selling to consumers, registration means either raising prices by 20% or absorbing it, which is why the threshold creates a genuine cliff — a sole trader at £89,000 turnover can be better off than one at £95,000.
The flat rate scheme exists to simplify this for small businesses, charging VAT normally but paying HMRC a fixed percentage of gross turnover. Whether it saves money depends entirely on how much VAT you would otherwise reclaim.
Assumptions and sources
- VAT rates
- Standard 20%, reduced 5%, zero 0%. The standard rate has been 20% since January 2011. checked 2026-08
- Registration threshold
- £90,000 of taxable turnover in any rolling twelve-month period. checked 2026-08
- Extraction formula
- net = gross ÷ (1 + rate). Verified in tools/test/payroll.mjs against a round-trip on every rate.
- Which rate applies
- A question of VAT law rather than arithmetic. HMRC Notice 701 and its sub-notices are the authority; this page is not.