What is the Net of VAT? Its Meaning & Calculation

The term ‘net of VAT’ refers to the price of a product or service before VAT is added. It represents the base cost without the tax, making it crucial for businesses and consumers to distinguish between net and gross prices. The gross price includes the VAT, whereas the net price does not.

How to Calculate Net of VAT?

In order to calculate VAT, apply the current VAT rate as a percentage to the net price and add this amount to get the gross price. To find the net price from the gross price, you reverse this process by dividing the gross price by one plus the VAT rate. If you have a VAT-inclusive figure (gross price), you can find the net price by dividing it by 1 plus the VAT rate.

When the VAT rate is 23% (standard VAT rate in Ireland), you divide the gross price by 1.23. This will give you the net price which is the original amount before VAT was added. The formula is given below:

Net Price = Gross Price / 1+VAT Rate

Instructions:

• The first step is to identify the gross price. This is the total price paid by the consumer, including VAT.
• Next, determine the VAT rate. The VAT rate is the percentage of tax applied to the net price. The standard VAT rate in Ireland is 23%.
• Add 1 to the VAT rate. This step accounts for the VAT portion of the gross price.
• Afterward, divide the gross price by 1 plus the VAT rate. This removes the VAT portion from the gross price.

Example:

Net Price = Gross Price / 1+VAT Rate

NP = €123/ 1 + 0.23

Net Price = €123/ 1.23

NP = €100

• Net Price = € 100 (the price before VAT)
• VAT Amount = 23% (the VAT portion of the gross price)
• Gross Price = € 123 (the total price including the VAT)

In conclusion, net of VAT simply means the price before the VAT is added. Understanding the net of VAT helps everyone manage costs better and make clearer, more informed decisions. Additionally, to calculate the net of VAT, simply divide the gross price by 1 plus the VAT rate (expressed as a decimal).