A common issue we come across is confusion when working out VAT. When presented with the total price including VAT this can be deceptive. As a tradesman you may have quoted someone a job including VAT, or if you are trying to calculate your predicted margins on a product based on your retail price.
We need to think differently about totals including VAT. Adding VAT is straight forward as we can easily add 20%, for example: John the digger charged £250 plus VAT totalling £300. If John charged £300 including VAT and you deducted 20% it would bring you to £240 not £250. You can see how this would cause a discrepancy in your accounts.
In conclusion deducting 20% from the total will not take you back to the price before VAT. So, the simplest way to calculate the VAT price is to just divide it by 6. (£300 divided by 6 equals £50) giving you the correct VAT amount. If you then minus the £50 from the full amount it brings you to the price before VAT (£250).
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Michelle
MJ Baker Accountancy