Taking 21% off 121 does not give the net price. The five most common tax mistakes and how to avoid them.
Key findings
- To remove tax, divide: 121 ÷ 1.21 = 100. Subtracting 21% gives 95.59, which is wrong.
- With 21% VAT, the tax is 17.36% of the final price.
- Work out margins on the net price and set aside the tax you collect: it is not yours.
Mistake 1: subtracting the percentage from the price including tax
The most common one. If a price of 121 includes 21% VAT, the net price is not 121 minus 21% (that gives 95.59). The 21% was applied to the net price, not the total, so you need to divide:
Net price = price including tax ÷ (1 + rate) → 121 ÷ 1.21 = 100. The tax is 21.
The same happens with any rate: 110 including 10% tax has a net price of 100, not 99.
Mistake 2: applying the rate to the total to find the tax
To find how much tax is inside a final price, do not multiply by the rate. In a price including 21% VAT, the tax is 17.36% of the total (21 ÷ 121). In 121, that is 21, not 25.41.
Mistake 3: working out margins on the price including tax
The tax you collect is not yours: you pay it to the tax authority. If you sell something that costs you 60 for 121 including VAT, your margin comes from the 100 net price, not the 121. Your margin is 40%, not over 50%. Always work out prices, margins and fees on the net price.
Mistake 4: spending the tax you collect
The tax lands in your account when you are paid, but you will have to hand it over when your return is due. If you spend it as if it were yours, you will come up short. Set it aside as soon as you are paid.
Mistake 5: rounding line by line
On invoices with many lines, rounding each line's tax and then adding up can differ by a few cents from calculating it on the total. It is not serious, but always use the same method and the one your country's rules require.
Which rate to apply
The rates on this page are examples. The right rate depends on the country, the product or service and sometimes the customer. Check with your country's tax authority or your adviser.
Add or remove tax from any price with the VAT calculator, and work out your margins on the net price with the margin and markup calculator.