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I have a customer who is disputing a (UK 20%) VAT total, but not sure how they are calculating this. This is their comment:

"The RRP is £225. Then minus the 10% discount which is £202.50. £202.50/1.2 = £168.75"

So they are saying 20% VAT of £202.50 leaves £168.75

I thought you simply take 20% from £202.50 which would be £40.50 leaves £162

So which is correct & why!

kb.
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  • VAT is $20$ per cent of the price without VAT, not of the RRP (this might sound confusing but once you play around with the numbers, you will understand it). If the price without VAT is $x$, then the final price (RRP) is $1.2x$. Therefore, you have to divide by $1.2$. I think the customer is right here. – Matti P. Jul 06 '18 at 08:48

2 Answers2

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If you take a number and you first add the 20% and then take the 20% you don't obtain the original number. In fact $100 + 20\% = 120$ and $120 - 20\% = 96$.

So, since VAT is "adding $20\%$" the inverse is not "subtract $20\%$".

Since "adding $20\%$" is equivalent to multiply by $1.2$ then dividing by the same quantity is correct.

If you want to subtract a percentage then the right percentage is $$ 100 \cdot \left( 1- \frac{1}{1.2} \right) = 100 \cdot 1.\bar 6 = 16.\bar 6 \% \approx 16.67\% $$

Enrico Polesel
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I calculate VAT in these ways of two different (most common) contexts:

X = Cost.
Y = VAT Calculation Basis.

1) Expanding a number by Y:

  X * Y / 100 == costsVAT (Add it to the cost to get sum).
  X * Y %     == costsVAT (Add it to the cost to get sum).
  X * 1.Y     == ES (End Sum).

2) Decerment VAT from a number:

  X * Y / 100 == Only VAT (decerment it from the charging sum to get end sum).
  X * Y %     == Only VAT (decerment it from the charging sum to get end sum).
  X / 1.Y     == cost decermented by costsVAT