How to Calculate VAT on an Invoice (With Examples)

What Is VAT (and GST)?

VAT (Value Added Tax) and GST (Goods and Services Tax) are consumption taxes charged on the sale of goods and services. The rate varies by country: 20% in the UK, 10% in Australia, 15% in New Zealand, 5–15% in Canada (GST/HST/PST), and so on.

As a VAT/GST-registered business, you:

Add the tax to your sale price and collect it from customers

Deduct the tax you paid on business purchases (input tax)

Remit the difference to the tax authority at each reporting period

You are a tax collector, not a taxpayer, on VAT/GST. The tax ultimately falls on the end consumer.

Two Starting Points: Exclusive vs Inclusive Prices

The calculation you need depends on whether your prices are:

Tax-exclusive (ex-VAT/ex-GST): The price you quote does not include the tax. Tax is added on top. This is standard in B2B.

Tax-inclusive (inc-VAT/inc-GST): The price includes the tax already. You need to extract the tax portion. Common in retail (B2C).

Calculating Tax on Tax-Exclusive Prices

Formula: Tax Amount = Net Price × Tax Rate

Example (UK VAT at 20%):

Net price: £150.00

VAT: £150.00 × 20% = £30.00

Gross (inc. VAT): £150.00 + £30.00 = £180.00

Example (Australian GST at 10%):

Net price: $220.00

GST: $220.00 × 10% = $22.00

Gross (inc. GST): $220.00 + $22.00 = $242.00

This is what you add to the customer's bill. The net amount is your income; the tax amount is collected on behalf of the government.

Extracting Tax from Tax-Inclusive Prices

If the gross (tax-inclusive) price is known, extract the tax with this formula:

Formula: Tax Amount = Gross Price × (Tax Rate ÷ (1 + Tax Rate))

Example (20% VAT):

Gross price: £180.00

VAT: £180.00 × (0.20 ÷ 1.20) = £180.00 × 0.1667 = £30.00

Net: £180.00 − £30.00 = £150.00

Example (10% GST):

Gross price: $242.00

GST: $242.00 × (0.10 ÷ 1.10) = $242.00 × 0.0909 = $22.00

Net: $242.00 − $22.00 = $220.00

What Must Appear on a VAT/GST Invoice?

To issue a valid VAT/GST invoice, you need:

Your VAT/GST registration number

The invoice date

Sequential invoice number

Buyer's details (for B2B invoices above certain thresholds)

Description of goods/services

The net amount (excluding tax)

The tax rate applied

The tax amount (shown separately)

The gross amount (including tax)

For invoices under a certain value (varies by country — typically £250/$1,000), a simplified invoice showing only the gross amount and the VAT/GST included may be acceptable for the buyer to claim input tax.

Input Tax: Reclaiming What You Pay

As a registered business, the VAT/GST you pay on business purchases (inputs) is offset against the tax you collect (outputs). You only remit the net difference.

Example:

Tax collected on sales: $8,500

Tax paid on purchases: $2,200

Tax payable to authority: $8,500 − $2,200 = $6,300

If you paid more tax on inputs than you collected on outputs, you claim a refund.

Keep all purchase invoices showing the tax paid — these are your claim documentation.

Multiple Tax Rates

Some countries have different rates for different product types:

UK: Standard 20%, reduced 5% (fuel, children's car seats), zero 0% (food, books, children's clothing)

Australia: Standard 10%, GST-free items (basic food, medical services), input-taxed

If you sell products at different rates, apply each correctly and show them as separate line items on your invoice.

VAT/GST Invoicing in Quotation Expert

Quotation Expert handles tax calculations automatically. Set your tax rate in business settings, choose whether prices are tax-exclusive or tax-inclusive, and every invoice calculates and displays the correct tax breakdown. Your tax registration number is included on all invoice PDFs, keeping you compliant without manual calculation.