Pretax, inclusive, VAT, etc. As a business, you must understand certain key concepts about calculating value-added tax (VAT). This article uses examples to explain the formulas (pretax and inclusive) you need to know to calculate the total VAT you must collect and pay to the French government. You can find additional information on the VAT rates used in France and the process for declaring VAT by following these links.
What’s in this article?
- What are pretax and inclusive prices?
- How to calculate VAT
- Formula for calculating VAT (from the pretax price)
- How to calculate the inclusive price
- How to calculate VAT from the inclusive price
- What are collected VAT and deductible VAT?
- How is payable VAT calculated?
What are pretax and inclusive prices?
The pretax price is the price before taking VAT into account; it’s the sale price assigned to a good or service by the business. The tax-inclusive price is the price for the good or service once VAT has been added; it’s the total price the customer pays at the point of sale.
How to calculate VAT
To calculate VAT, you need to know the tax rate that applies to your industry (20%, 10%, 5.5%, or 2.1%) as well as:
- the pretax price, i.e., the price of the good or service without VAT
- the inclusive price, i.e., the price of the good or service including VAT
Formula for calculating VAT (from the pretax price)
To find the total VAT from the pretax price, multiply the latter by the VAT rate that applies in your industry. This calculation will give you the total VAT for your good or service:
pretax price x VAT rate = total VAT
For example, if a TV costing €400 is subject to the standard VAT rate of 20%, the total VAT will be €80. See the calculation below:
€400 x 0.20 = €80
In the same way, a bottle of orange juice costing €4 that has a reduced VAT rate of 5.5% applied will have a VAT total of €0.22:
€4 x 0.055 = €0.22
Finally, a restaurant owner selling premade meals at €20 with an intermediate 10% VAT rate will charge a total of €2 VAT:
€20 x 0.10 = €2
How to calculate the inclusive price
To find the tax-inclusive price, you need the pretax price and the total VAT amount. Use the following formula to add the pretax price to the total VAT calculated earlier:
pretax price + total VAT = inclusive price
Using the example of the TV, the inclusive price comes to €480:
€400 + €80 = €480
It’s the price that the business will charge the customer at the point of sale; €80 must be paid to the government.
The same formula applies to the bottle of orange juice and the premade meal:
€4 + €0.22 = €4.22
€20 + €2 = €22
Note that to convert the inclusive price to the pretax price, you simply need to subtract the total VAT from the inclusive price.
How to calculate VAT from the inclusive price
You can calculate the total VAT without having the pretax price. The calculation uses the tax-inclusive price and the VAT rate applied to your good or service.
Divide the inclusive price by the VAT rate + 1. Then multiply this number by the VAT rate again to get the total VAT. See the formula below:
[inclusive price / (1 + VAT rate)] x VAT rate = total VAT
Let’s apply this formula to the TV example (that costs €480 with a 20% VAT rate):
[€480 / (1 + 20%)] x 20%
(€480 / 1.2) x 0.2 = €80
The total VAT we get from the inclusive price is €80.
Let’s take the bottle of orange juice example (a price of €4.22 including VAT at 5.5%):
[€4.22 / (1 + 5.5%)] x 5.5%
(€4.22 / 1.055) x 0.055 = €0.22
According to the formula, the total VAT we get from the inclusive price is €0.22.
Finally, here’s the premade meal example (costing €22 including VAT at 10%):
[€22 / (1 + 10%)] x 10%
(€22 / 1.1) x 0.1 = €2
The VAT we get from the inclusive price is €2.
What are collected VAT and deductible VAT?
Collected VAT refers to the VAT a business charges as a part of selling goods or services to customers. It’s the amount paid to the government—monthly or yearly, depending on the system chosen. However, the business doesn’t always pay the total amount to the government. The business can benefit from a VAT reduction on the purchases or expenses it requires to operate.
The VAT the business spends on purchases related to its operation is called deductible VAT. Essentially, in this case, the business becomes the customer. This VAT total amassed by the business is deductible from the total VAT collected by the government.
Deduction access conditions
To benefit from a VAT deduction, the business must retain the original invoice as proof of the purchase. Goods and services purchased must be intended for professional—and not personal—uses.
Exclusions
Accommodation costs for management and employees at the business are excluded from VAT deductions. However, this deduction does apply to the cost of accommodation for safety, surveillance, and security personnel. VAT is not deductible on vehicle costs for staff unless the business operates as passenger transportation, a driving school, or vehicle hire. VAT is also not deductible on goods presented for free or at a price lower than their usual value.
VAT-exempt transactions
Exports, deliveries within the European Union, teaching activities, and most banking, financial, and medical transactions are not subject to VAT.
How is payable VAT calculated?
At the end of each reportable accounting period, the business must calculate its total amount of collected VAT and deductible VAT. If the amount of collected VAT is higher than the amount of deductible VAT, the business pays the difference to the government. On the other hand, if the business finds its deductible VAT is higher than its collected VAT, it will receive a VAT credit that the government will pay out. See the example below to get a better understanding:
A shoe shop sells the following goods in May:
- a pair of sandals at €90 (pretax price)
- a pair of sneakers at €130
- a pair of boots at €150
With a 20% VAT rate on the products sold, the collected VAT comes to €74:
€90 x 0.20 = €18
€130 x 0.20 = €26
€150 x 0.20 = €30
€18 + €26 + €30 = €74 of collected VAT
This same business buys a new cash register in May, and it costs €140 pretax. This cash register is subject to a 20% VAT rate and has €28 of VAT:
€140 x 0.20 = €28 of deductible VAT
To find the VAT it needs to pay, the business must subtract its deductible VAT from its collected VAT:
Collected VAT - deductible VAT = VAT to pay
€74 - €28 = €46 of VAT to pay
Because the collected total is higher than the deductible total, the business pays the government €46 in May and doesn’t receive any credit.
Although there are several formulas and nuances regarding calculating VAT, you don’t need to remember everything. You can use an online VAT calculator like this one, or refer to this article to help ensure an error-free VAT calculation. Alternatively, you can use a tool like Stripe Tax, which automates all your VAT calculations, collections, and declarations in a single integration.