What VAT actually is
VAT is a consumption tax collected in stages along a supply chain. You charge it on what you sell, reclaim it on what you buy, and hand the difference to the tax authority.
Because it is collected in stages, the business is a collector rather than the payer. The end consumer carries the cost.
When you have to register
Registration thresholds vary by country, and crossing one is usually based on a rolling twelve-month turnover rather than a calendar year. Watch the trend, not the annual total.
Voluntary registration can pay off if most of your customers are VAT-registered businesses and you carry meaningful input tax.
The reverse VAT trap
The arithmetic that trips people up is reverse VAT: extracting the tax from a gross figure. Divide the gross by one plus the rate to get the net, then subtract.
At 21%, a gross of 121 becomes a net of 100 and a tax of 21. Subtracting 21% from the gross gives the wrong answer, and it is the single most common invoicing error we see.
Keep evidence for every reclaim
In most jurisdictions a valid invoice with the supplier's VAT number is the minimum bar for deducting input tax.
Store invoices digitally, reconcile monthly, and never reclaim from a receipt that lacks a tax number.
- VAT
- Tax
- Small business
Frequently asked questions
- How do I remove VAT from a gross price?
- Divide the gross amount by 1 plus the rate as a decimal. At 20%, divide by 1.2 — the result is the net price and the remainder is the VAT.
- Is VAT the same as sales tax?
- No. Sales tax is charged once at the final sale; VAT is charged and reclaimed at each stage of the supply chain.
