How to calculate reverse VAT
Value Added Tax (VAT) is an indirect consumption tax applied to goods and services across the UK, European Union, and over 160 countries worldwide. Under European consumer protection regulations, retail shelf prices and commercial invoices must legally display VAT-inclusive totals.
When filing quarterly VAT returns, calculating input tax credits, or recording business expenses, bookkeepers need to extract the original pre-VAT net subtotal from the total invoice.
HMRC VAT fractions explained (20% & 5%)
The UK tax authority, Her Majesty’s Revenue and Customs (HMRC), defines official VAT fractions to allow accountants to calculate VAT amounts directly from gross figures without intermediate rounding.
- 20% Standard Rate Fraction: 20/120 = 1/6. Dividing any gross total by 6 yields the exact 20% VAT component. (£120 ÷ 6 = £20).
- 5% Reduced Rate Fraction: 5/105 = 1/21. Dividing a 5% reduced gross receipt by 21 yields the VAT component. (£105 ÷ 21 = £5).
European & UK VAT Rates Table
| Country | Standard Rate | Reduced Rate | Divisor | VAT Fraction |
|---|---|---|---|---|
| United Kingdom | 20% | 5% | 1.20 | 1/6 |
| Germany (MwSt) | 19% | 7% | 1.19 | 19/119 |
| France (TVA) | 20% | 5.5% / 10% | 1.20 | 1/6 |
| Spain (IVA) | 21% | 10% | 1.21 | 21/121 |
| Italy (IVA) | 22% | 10% | 1.22 | 22/122 |
| Netherlands (BTW) | 21% | 9% | 1.21 | 21/121 |
| Belgium (TVA/BTW) | 21% | 6% / 12% | 1.21 | 21/121 |
| Ireland (VAT) | 23% | 13.5% / 9% | 1.23 | 23/123 |
| Poland (PTU/VAT) | 23% | 8% / 5% | 1.23 | 23/123 |
| Sweden (Moms) | 25% | 12% / 6% | 1.25 | 1/5 |
Reverse VAT vs. Reverse Charge mechanism
It is important to distinguish between reverse VAT mathematical calculation and the Reverse Charge VAT accounting rule:
- Reverse VAT Calculation: The mathematical process of extracting pre-tax net cost from a tax-inclusive total receipt.
- Reverse Charge VAT Mechanism: An anti-fraud tax accounting rule for cross-border B2B services or construction industry transactions (CIS), where the purchaser self-assesses VAT instead of paying supplier VAT.
VAT accounting & input tax reclaim guidelines
VAT-registered businesses can reclaim input VAT paid on business expenses. When logging receipt data into Xero, QuickBooks, or Sage:
- Always check whether the supplier receipt contains a valid VAT Registration Number.
- Ensure the correct rate (Standard 20%, Reduced 5%, or Zero-rated 0%) is selected before applying the reverse calculation.
- Keep detailed digitized copies of all invoices for 6 years in compliance with HMRC records policy.