How VAT is calculated on product and delivery costs

In order to arrive at the correct amounts for:

- NET (cost of a product or delivery without VAT)
- VAT (the VAT amount being charged on a product or delivery)
- GROSS (the total of the NET and the VAT amounts)

calculations need to be carried out by the platform. This help guide explains the process that is followed.

Please note, the guidance published below provides examples for VAT calculations on businesses located in the United Kingdom, where the standard rate of VAT is 20%. If your business is in another EU member state, the VAT rate might be different.

1. Regardless of whether you enter prices into your account including VAT or excluding VAT, the platform stores the price, in the database, exclusive of VAT. This figure is known as the net.

So, if you have chosen to enter prices inclusive of VAT we'll first remove the VAT by dividing the price entered by 1.2.

If you have chosen to enter prices excluding VAT, we'll store that figure.

2. The net figure is always stored to 4 decimal places.

3. Once we have the net price we'll then multiply this by 1.2 in order to arrive at the VAT inclusive price (known as the 'gross'). This figure is rounded to 2 decimal places of a pound, i.e. the nearest 1p.

4. Using the net price we'll calculate the VAT amount by multiplying it by 0.2. This figure is also rounded to the nearest 1p.

5. Finally, a new net price is calculated by taking the VAT amount from the gross.

As an example, a product's price is entered as £3.95. The stored net amount is £3.2917

The gross is calculated as £3.2917 x 1.2 = £3.95004 (rounded to £3.95).

The VAT is calculated as £3.2917 x 0.2 = £0.65834 (rounded to £0.66).

The net is calculated as £3.95 - £0.66 = £3.29.


HMRC VAT Guide

HMRC publish a VAT guide that prescribes how VAT should be calculated. It's detailed at https://www.gov.uk/guidance/vat-guide-notice-700.

Part 17.5 deals with the calculation of VAT on invoices.

This part of the guide provides for two different options for the calculation of VAT (detailed at 17.5.1 and 17.5.2). Our platform follows the guidance from 17.5.2, calculating VAT per unit or per article, taking the second option where VAT is rounded to the nearest 1p.

This means, when calculating the VAT, net and gross amounts for a product, we do so on an individual unit (quantity of 1) for that product. We don't look at a line item (i.e. multiple quantities of the same product) and we don't look at the order total as a whole.


Rounding and other discrepancies

Because 1p is the smallest unit of currency in the United Kingdom, values for the prices of products and delivery rates have to be rounded where those prices are fractions of a penny. In the example above, the VAT amount is £0.65834 which is rounded to £0.66.

Where rounding occurs, discrepancies will enter into the calculations that are not 'obvious' to the eye and may make it seem like VAT or other amounts are being calculated incorrectly.

For example, where you have a product priced at £3.95 and a customer orders 1000 of them, the VAT amount will be £660.00 (£0.66 x 1000, not £0.65834 x 1000).

This will mean that the VAT amount won't always show as exactly 1/6th of the gross amount, which would be £658.33 in our example.


Workarounds

As a platform, we have to make a choice in the way that VAT is calculated, but the process we follow isn't ideal for everyone. For most users, the way that VAT is calculated on the platform and displayed to your customers will be fine and you won't experience any problems.

For some customers, particular those who operate under one or more of the following scenarios;

i) A large amount of low priced products (e.g. where the price is under £1.00)
ii) Where customers purchase a high quantity of items
iii) Where the price of your products is affected by rounding (e.g. a product that is £3.93 inc. VAT has a net value of £3.275 and a VAT value of £0.655)

you may find that the VAT amount on an order is not exactly 1/6th of the gross amount. Depending on the quantity of products ordered by a customer and/or the value of an order, the discrepancy might range from a few pence to a few pounds.

The way that VAT is calculated on your orders cannot be adjusted from the formula shown above, this is fixed within the platform.

But, one way to 'mitigate' against an invoice which might look 'odd' to the untrained eye would be to include a separate column on invoices for each line item.

You could edit your order PDF and include one or both of the following variables in order to display the appropriate VAT amount.

{{ format_price(product.price_including_vat - product.price) }} - to display the VAT amount on a single unit of a line item

{{ format_price((product.price_including_vat - product.price) * product.quantity) }} - to display the VAT amount on the total quantity of a line item

If you need help adjusting your order PDF or have any questions about this guide or VAT calculations please contact us.