Seeking Clarification on VAT Calculation

[Kiwn Jey]

Hello community,

I have a question regarding the calculation of Value Added Tax (VAT), and I'm reaching out to get some insights from fellow members.

Suppose I've received a net payment of 200 euros, and I need to calculate the gross amount for VAT purposes with a VAT rate of 25% in my region. I stumbled upon a formula that suggests multiplying the net amount by 1 plus the VAT percentage, which in this case is 1.25. According to the formula, the gross amount should be 250 euros.

However, during my attempt to verify this calculation:

• If 250 euros represents 100%, 1% would be 2.50 euros.
• 25% would be 62.50 euros.
• Subtracting 62.50 euros from the gross amount of 250 euros leaves me with only 187.50 euros, which is less than the initial net payment of 200 euros.

I'm a bit puzzled and suspect there might be an error in my approach. Could someone please help me identify where I might be going wrong or provide guidance on the correct method to calculate the gross amount with a VAT rate of 25%?

I appreciate any assistance or advice you can offer.

Thank you.

[LaurieAG]

100% + 25% = 125% = 125/100

200 * 125/100 = ?

250 * 100/125 = 200/1.25 = ?

[joigus]

100% of 200 plus 25% of 200 is 250

There's no reason why 100% of 250 minus 25% of 250 should produce 200

They are %'s of different quantities.

Goverments and oligopolies sometimes use these maths to raise the prices a little more than it would appear to people untrained in maths.

(1.01)¹⁰ is more than 1.1 (it's 1.1046), so ten increases of 1% increase more than 1 increase of 10%

[Sensei]

AFAIK, companies only receive the gross amount, not the net. Even if the b2b catalogs have a net amount.

If you receive 200 EUR gross, with 25% VAT, your company has a net 200/1.25 = 160 EUR income, and 200-160 = 40 EUR VAT it will have to send to the government.

When a company creates a product catalog, it does the opposite, i.e. 160 EUR net x 1.25 = 200 EUR gross or 200 EUR net x 1.25 = 250 EUR gross.

 

In reality, it is a bit more complicated. A company sells something with VAT to its customers/companies, and has to pay other companies for something (the ingredients to make the product) also with VAT. Sometimes these VAT taxes are different, e.g. food has a low VAT, but a finished meal in a restaurant is taxed differently than the ingredients. Only the difference is sent to the government. The company that sold the ingredients/components also has to pay VAT, but at a different rate.

The company that sells the ingredients/components does not know whether the buyer is a retailer or another company and whether it is a VAT taxpayer or not (company can opt-in or opt-out in some industries to some level of income)

Edited November 30, 2023 by Sensei

[Kiwn Jey]

Thank you, everyone, for the detailed answers, special thanks to joigus much clearer now, also found an online VAT calculator tool, it is best for automatic calculations. 

Edited December 1, 2023 by Phi for All
commercial link removed by moderator