This value added tax aka VAT calculator is a tool you can use to estimate the amount of VAT you need to pay and the gross price of the product based on its net value. Before you use this online VAT calculator, you may want to take a moment to read more about the issue: what is VAT, what is its history and how to work out VAT manually.

What is VAT

Value added tax (VAT) also called goods and services tax (GST) is based on spending on goods and services, therefore it is a consumption tax. The name refers to the fact that it is the "added value" which is being taxed, that is the sale price of a product after deducting the cost of materials and other taxable inputs. Another form of consumption tax is the sales tax.

What is the difference between VAT and sales tax

VAT is applied at every stage of production of goods and services and is calculated based on the "added value" only. This means that each company in the production chain pays VAT only from the "added value" it creates itself. This process goes on until the product reaches its final recipient - the customer. He/she does not produce any "added value", therefore it is he/she who is the ultimate bearer of the tax burden.

Sales tax on the other hand is charged on the total value of sold goods or services when the sale takes place. Therefore it is paid only once in contrast to VAT, which is calculated multiple times.

Margin and VAT

Some companies have the right to choose another form of VAT taxation called VAT margin scheme. This procedure allows companies to pay VAT on their profit margin on sold goods. In contrast to ordinary VAT the seller cannot deduct VAT from purchased goods or services. If you need to know first how to calculate margin profit you can use our gross margin calculator. If you want to use it in combination with VAT, try the margin and VAT (it has nothing to do with the "VAT margin scheme, though").

How to work out VAT

To calculate VAT you need to:

  1. Determine the net price (VAT exclusive price). Let's make it €50.
  2. Find out the VAT rate. It will be 23% in our example. If expressed in percentages, divide it by 100. So it's 23 / 100 = 0.23.
  3. To calculate the tax amount: multiply the net price by VAT rate. €50 * 0.23 = €11.50.
  4. To determine the gross price: multiply the net price by VAT (again, we'd get €11.50) rate and then:
  5. Add it to the VAT exclusive price. €50 + €11.50 = €61.50.

In essence, it's just a specific kind of net to gross calculation. If you want to do it quickly, simply use our online VAT calculator.

History of VAT

Compared to other forms of taxation VAT with only just over 60 years of operation is relatively young, nevertheless, it has become one of the most important sources of revenue for the government.

A German businessman Carl Von Siemens came up with the idea in the 1920's, however, it was Maurice Lauré, the joint director of the French tax authorities, who turned Siemens's idea into a system and is considered to be 'the father' of VAT. It was implemented in France in 1954. Shortly after, the VAT was also applied in former French colonies - Côte d’Ivoire and Senegal, and in 1965 Brazil. Initially the new tax did not gain much recognition. In the late 1960' there were only 10 countries which implemented VAT into their tax systems. Its worldwide success was due to the expansion of the European Union, as adopting VAT was one of the prerequisites for membership. By 1989 VAT was present in 48 countries (primarily in Western Europe and Latin America), but with strong support from the IMF the number of countries implementing it grew to over 140.

Mateusz Mucha

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