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How is VAT calculated?
Value added tax (VAT) is calculated directly on the basis of the selling price of the product or service concerned. Therefore, as a trader, you must know the applicable VAT rate for your activity and indicate the following on your invoices:
- the net sales price without VAT
- the applicable VAT rate
- the amount of VAT
- the total amount (incl. VAT)
VAT calculation on the basis of the net price
The calculation of the VAT amount based on the price without VAT is as follows:
Normal rate: (Net price excl. VAT / 100) x 123 = Total price with VAT
Reduced rate (13.5%): (Net price excl. VAT / 100) x 113.5 = Total price with VAT
Reduced rate (9%): (Net price excl. VAT / 100) x 109 = Total price with VAT
Reduced rate (4.8%): (Net price excl. VAT / 100) x 104.8 = Total price with VAT
VAT Calculation on the basis of the total price
The calculation of the VAT amount based on the total price is as follows:
Normal rate: total price incl. VAT / 1.23 = net price without VAT
Reduced rate (13.5%): total price incl. VAT / 1.135 = net price without VAT
Reduced rate (9%): total price incl. VAT / 1.09 = net price without VAT
Reduced rate (4.8%): total price incl. VAT / 1.048 = net price without VAT
Irish VAT rates
The VAT rates in Ireland are very complicated.
The standard rate is 23%.
There are three reduced rates: 13,5%, 9%, 4,8% and 0%.
The reduced rate of 13% is for items including electricity, fuel (coal, heating oil, gas), building and building services, veterinary fees, short-term car hire, agricultural contracting services, cleaning and maintenance services.
The reduced rate of 9% is for for newspapers and sporting facilities and tourism-related activities including hotels, restaurants, cinemas and hairdressing.
The reduced rate of 4,8% is for especially for agriculture: including greyhounds, livestock and the hire of horses.
The zero rate is for all exports, tea, milk, coffee, books, breaed, children’s clothes and shoes, medicine, fertilisers, vegetable seeds and fruit trees and large animal feed.
More about VAT
VAT is the abbreviation of Value-Added Tax. This is a kind of comsumption tax. All countries in the European Union (EU) impose VAT including Ireland and the United Kingdom (UK). VAT is charged on all goods and services that are provided by a VAT-registered business or on goods that are imported and then sold by a local company.
VAT stands for Value Added Tax. VAT has to be paid by the purchaser for every product or service purchased. The company providing the product or service then pays this VAT to the tax authorities when they do their VAT returns. The more someone purchases, the more VAT they will have to pay to the authorities. VAT is sometimes referred to as ‘sales tax’.
Before a finished product reaches the consumer, there are usually different suppliers and companies involved in the production process. Consider, for example, the raw materials from which a given product is made. When a company purchases these raw materials, that company will also have to pay VAT as part of the total amount invoiced by the supplier of the materials. If other companies are involved in the production process, they will also have to charge VAT as part of their invoices and in turn pay this to the government.
However, companies have one big advantage over end consumers. On the one hand, companies have to pay any VAT they receive from customers who buy their products to the tax authorities, but, on the other hand, they can deduct the VAT that they themselves have paid to their suppliers, so that it is possible that the amounts cancel out.
This is calculated as part of the VAT returns that have to be prepared and submitted to the tax authorities each month. The preparation and submission of VAT returns is done by accountants. The rules are so complicated in this regard that it is advisable to employ an expert. In theory, you can do everything yourself, but then only with a solid grasp of all the applicable rules. However, the rules can change over time. New business owners sometimes do their VAT returns themselves because they do not yet have sufficient income to afford the services of an accountant. The tax authorities regularly carry out checks to see whether VAT is being calculated and paid correctly. These days, the authorities make use of sophisticated computer algorithms that are designed to reveal any irregularities.
Every company has its own VAT number. On the internet you can find websites where you can look up and check the validity of VAT numbers. In some countries, the VAT number is the same as the company number. This simplifies the administrative burden since every company is then associated with one specific number. A valid VAT number must be included on every invoice.
VAT is an important source of government income. Whenever a government's budget falls short, there is a temptation to make up the difference by increasing the rate of VAT. An increase of a just couple of percentage points can already make a big difference. However, in most European countries, the VAT to be paid is already so high – certainly in comparison with the US and Australia – that it is difficult to raise it any higher. The purchasing power of consumers would undoubtedly suffer as a result and there is also the question of whether the trade unions would go along with such a measure. The less purchasing power held by consumers, the lower the level of consumption in society and the greater the strain upon the economy. All factors have to be taken into account when making such policy decisions in order to choose the best option. Sometimes there is no other option, however, than to raise taxes. This was the case following the banking crisis, when governments had to provide financial support to banks in order to prevent them going under.
We can further ask the question of how socially beneficial the concept of VAT actually is. After all, the user of a product or service will always have to pay the same rate of VAT. This means that whether rich or poor, everyone pays the same amount. It is not the case that a poor person pays less VAT than a wealthy person. This makes the raising of VAT a rather asocial measure. Income, however, is taxed according to different tax scales and do therefore take social factors into account. There is therefore a choice to be made as to whether VAT should also be corrected to take social factors into account. A person with little money at his or her disposal would then have to make do with cheaper products for which the VAT would of course be lower too. The purchase of luxury products with a high amount of VAT would be restricted to those with higher incomes.
There are however different rates of VAT. In addition to the standard rate, there are usually lowered rates as well. This is done in an attempt by governments to support certain industries or to to make certain corrections for social factors. In some countries there is even a rate of zero percent. There are, for example, lowered rates for fuel, construction materials, cultural products, newspapers, health services, medicines, hotels, transport, children's clothing, and so on.
The concept of VAT exists in almost every country in the world, including developing nations in Africa. But what is the situation when you purchase a product abroad? Should you then pay VAT again upon re-entering your home country? In the European Union, at least, this is not the case. When you purchase a product abroad, you pay the VAT there and it is not required to pay any further VAT upon returning home. If, however, a product is imported from outside of the European Union, you are sometimes required to pay import duty. These rules also apply for purchases made online. So you can buy online without worry.
In shops the prices often only mention the total amount to be paid and the VAT amount is not shown separately from the actual purchase price. This website helps to make this calculation easy for you. Here you can calculate the net amount (excluding VAT) based on the total gross price. Alternatively, you can also do it the other way around: based on the net amount, you can calculate the amount of VAT and in turn the total gross amount. If you work independently, you will regularly have to make this kind of calculation and you will find this website to be a handy tool. Calculations can be made based on different rates of VAT.