This easy to understand guide will explain how to calculate VAT for both the situation where you need to add VAT to a price and when you need to remove VAT from a price.
The first thing to understand, is that since VAT (Value Added Tax) is expressed as a percentage, any calculation involving VAT requires working with percentages.
Now, when it comes to percentages, it is helpful to break the word up into its two parts – “per” and “cent”. Next think of “cent” as being short for “century” (as in a hundred years, or when a batsman gets a hundred runs in cricket) and then the word percent becomes quite intuitive and a lot easier to work with:
Percent = per hundred.
In South Africa, the current VAT rate is 15%, which as we just saw means “15 per 100”. In short that means you pay R15 of VAT per R100 of cost.
In Mathematics per means to divide.
This means that we can also write 15% (which is 15 per 100) as 15 divided by 100 – which is the same as (15/100).
Now that we understand what 15% means, we can move on to using this VAT rate to calculate how much VAT to add onto a price to find the VAT inclusive amount, and how much VAT to subtract from a price to find the price excluding VAT.
To calculate the amount of VAT payable, it helps to remember that VAT is charged as a percentage “of “ the price.
In Mathematics, the word of means multiply.
So to calculate the VAT on any purchase price, we need to multiply the price by the VAT percentage.
For a purchase price of x, we multiply x by 15%.
But recall that 15% means 15 per 100 or 15/100.
So the VAT amount on x is simply x multiplied by 15/100 = (x)(15/100).
This is best illustrated by way of an example - for something that costs R50, we can find the VAT payable by multiplying R50 by 15%. And since 15% is just (15/100) we can calculate the amount of VAT as:
This means that there is VAT payable of R7 on a purchase price of R50.
If a price excludes VAT and you want to know what the total cost including VAT would be, you need to calculate the VAT amount and then add it to the original amount.
Total (including VAT) = Original Amount + VAT Amount
You saw how you can get the VAT amount in the previous section (by simply multiplying the original amount by 15% (15/100)).
As an example, for something that costs R50 excluding VAT, the amount of VAT payable is R7.
The total amount including VAT would then be:
|Total (Including VAT)||= Original Amount + VAT Amount|
|= R50 + 7|
If a price includes VAT and you want to know what the price would be excluding VAT, you need to calculate the VAT amount that was added in order to get to the amount including VAT.
This calculation is a little more tricky than the calculation for including VAT.
To start, we know that the price including VAT has had VAT of 15% added to the original amount. Recall that 15% is (15/100 = 0.15) and we saw in the previous section that moving from an amount which excludes VAT to an amount that includes VAT we multiplied the amount which excludes VAT by 1.15.
That means if we want to go in the opposite direction (i.e. from an amount that includes VAT to an amount which excludes VAT) we need to divide by 1.15.
Total (excluding VAT) = Total (Including VAT)/1.15
For example, if we had a total of R57 which included VAT and we wanted to find out what the value without VAT would be:
|Total (Excluding VAT)||= Total (Including VAT) / 1.15|
|= R57 / 1.15|
The amount of VAT which was included in the price is then simply the Total including VAT less the Total excluding VAT.
VAT Amount = Total (Including VAT) – Total (excluding VAT)
From the example above
|Total (Excluding VAT)||= Total (Including VAT) - Total (Excluding VAT)|
|= R57 - R50|
Of course, if you don't want to do VAT calculations manually, just use our Online VAT Calculator which will quickly do all the number crunching for you.