What is VAT? Value-added tax explained simply
If you've shopped in Europe, Korea, or most of the world, you've paid VAT — often without seeing it as a separate line. Here's what value-added tax is and how to work it out both directions.
What VAT is
VAT (Value-Added Tax) is a consumption tax added to most goods and services. It's collected in stages along the supply chain — each business charges VAT on what it sells and reclaims the VAT it paid on what it bought — but the person who ultimately carries the cost is the final consumer. Rates vary by country: 20% in the UK, 19% in Germany, 10% in Korea, and so on.
How it differs from US sales tax
- Where it's added: US sales tax is added once, at the register. VAT is built in at each stage of production.
- What you see: in most VAT countries the displayed price already includes VAT — the sticker is what you pay. US prices usually show pre-tax, with tax added at checkout.
- Who deals with it: businesses reclaim VAT they've paid, so for them it's roughly neutral; the consumer bears the final charge.
Adding VAT to a price
Multiply the net price by (1 + rate). At 20%: £50 × 1.20 = £60.
Removing VAT (the part people get wrong)
To find the pre-tax price from a VAT-inclusive one, you divide — you don't subtract 20%.
A £60 price at 20% VAT: net = 60 ÷ 1.20 = £50, so the VAT portion is £10. Subtracting 20% of £60 (£12) would be wrong, because the 20% was added to £50, not £60.
Why it matters
Freelancers and small businesses need the split constantly — for invoices, expense claims, and pricing. Getting the "remove VAT" direction right is the difference between accurate books and a quietly growing error.