With most European countries shifting over to vat or value added tax for collecting tax on goods and services it is important that you get the right vat formula for calculating various vat rates. For example, if you are a vat registered trader in the UK that has also embraced vat then calculating correct vat rates is imperative while making a vat invoice, filing vat returns or even when applying for vat refunds.
All matters related to vat, customs and excise duties in the UK are handled by Her Majesty’s Revenue and Customs department or hmrc. This department has ushered all types of goods and services into around 14,000 classifications that fall into various vat rates. While some goods and services fall into the standard vat rate of 17.5% that will increase to 20% after January 4, 2011, others fall into the reduced vat rate of 5%. Still others, related to children, hospitals or gambling fall into the zero rate or vat exempt category while a few simply fall outside the vat net.
Thus, you will firstly need to know the classification of a particular product or service under which your vat rates fall before you can apply the corresponding vat formula. For example if you are selling a coat for £100 pounds exclusive of vat then you will need to calculate the amount of vat to be charged on the coat. If the coat attracts standard vat rates then you will need to calculate 17.5% over the basic rate and then add the vat rate to come up with the gross rate. In this case, you vat rate would be £17.50 being 17.5% over £100 and the total of your vat invoice will be £117.50. However, you might also need to calculate the amount of vat from any amount that displays a vat inclusive rate, especially when you file your vat returns where you will be required to show vat rates separately.
Thus, your formula for the same example as above would be to take the vat inclusive amount, i.e. £117.50 and divide it by 1.175, which in turn will give you the vat exclusive price of £100 and the vat amount as £17.50, which is the remainder of vat inclusive price minus the vat exclusive price. However, this formula of 1.175 will change from January 4, 2011 onwards when the standard vat rates rise and the formula to calculate vat rates on reduced vat goods and services too will be different.
You can easily ask your vat agent to provide you with the correct formula to calculate vat or even visit the internet where you can download vat calculators for various eu countries including the UK. In addition, your vat agent should also be an expert in uk vat and eu vat rates so that all your vat returns and vat refunds too are filed only with the help of correct formulae. You can also visit the hmrc vat website to learn more about calculating vat rates as well as to use various other online vat services offered by hmrc to make your life easier.
Vat is a very simple method of paying and collecting taxes although you first need to get the hang of calculating vat rates correctly and quickly before you can become comfortable within the system. You should ensure that you get the right vat formula for calculating various vat rates so that your vat invoices, vat returns and vat reclaims remain within the boundaries of vat rules.