Practise adding 20% VAT, removing VAT from gross prices and working with the 5% reduced rate.
A bill shows £273 including 5% reduced-rate VAT. What is the net price?
Value Added Tax (VAT) is charged on most goods and services sold in the UK. The standard rate is 20%, but a reduced rate of 5% applies to certain categories including domestic energy, children's car seats, and some renovation work. There is also a zero rate (0%) for most food, children's clothing, books, and medicines, and some supplies are exempt from VAT altogether.
In practice you need three distinct skills. First, adding VAT to a net (ex-VAT) price to find the gross price — this is what suppliers do when they raise invoices. The formula is: gross = net × 1.20 (or × 1.05 for reduced rate). Second, removing VAT from a gross (VAT-inclusive) price to find the net amount — this is what bookkeepers do when entering invoices onto an accounting system. The formula is: net = gross ÷ 1.20. Third, finding the VAT element of a gross price to show as a separate line on an invoice or reclaim form: VAT = gross − (gross ÷ 1.20), or equivalently gross × (20/120).
This drill generates realistic UK prices and tests all three calculation types at both the standard and reduced rate. Essential skills for anyone who runs a business, does freelance work, studies accountancy, or needs to reconcile supplier invoices.
A common trap: many people try to find the VAT in a gross price by simply taking 20% of the gross. This overestimates the VAT. If a gross price is £120, the VAT is NOT £24 (20% of £120). The correct figure is £20, because the net was £100 and 20% of £100 is £20. Always divide by 1.20, not multiply by 0.20, when extracting VAT from a gross price.
For the reduced rate, the same logic applies with 1.05. A gross price of £52.50 includes 5% VAT of £2.50 (net £50).
Multiply the net price by 1.20. Example: £250 × 1.20 = £300 (£50 VAT).
Divide the gross price by 1.20. Example: £300 ÷ 1.20 = £250 (the VAT was £50).
The reduced rate is 5%, applied to items like domestic fuel and power, children's car seats, and some energy-saving materials in homes.
Because VAT was calculated on the net price, not the gross. If the net was £100 and VAT is £20, the gross is £120. Taking 20% of £120 gives £24 — which is wrong. The correct fraction is 20/120 = 1/6 of the gross.
From April 2024, businesses must register for VAT once taxable turnover exceeds £90,000 in any rolling 12-month period.
Most food for human consumption (not restaurant meals or hot takeaways), children's clothing and footwear, books and newspapers, prescription medicines, and most exports.
Zero-rated means VAT is charged at 0% — the business can still register and reclaim input VAT. Exempt means no VAT is charged and the business cannot reclaim input VAT on related costs. Examples of exempt: financial services, insurance, education.
A valid VAT invoice must show the supplier's VAT number, the date, a description of supply, the net amount, the VAT rate and amount, and the gross total. Businesses need valid VAT invoices to reclaim input VAT.
Domestic gas and electricity attract the reduced 5% VAT rate. Business energy is charged at the standard 20% rate.
Yes — this drill generates questions at both the 20% standard rate and the 5% reduced rate so you get practice with both.
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