What Does Net of VAT Mean?

If you run a business or deal with invoices, you'll often come across the phrase net of VAT. This is a common accounting term in the UK and simply refers to a price that does not include VAT. Understanding the difference between net, gross, and VAT-exclusive pricing is essential for invoicing, quoting customers and working out your tax obligations.

This guide explains what net of VAT means, how to calculate it, and how it applies when you're VAT registered.

What Is VAT?

VAT (Value Added Tax) is a consumption tax applied to most goods and services in the UK. The current standard VAT rate is 20%, though some goods qualify for 5% or 0% rates.

Businesses with VAT-taxable turnover above £90,000 (2024–25 threshold) must register for VAT with HMRC. Once registered, you can charge VAT on sales (output VAT) and reclaim VAT on purchases (input VAT).

What Does Net of VAT Mean in the UK?

When a price is quoted net of VAT, it means VAT is not included in the price shown. The VAT will be calculated and added on top of the net price at the relevant rate.

So if you see an item priced at £100 net of VAT, and VAT is 20%, the final cost will be:

£100 + £20 VAT = £120 gross total

Net is the base price. VAT is the tax amount. Gross is the final amount payable.

How to Calculate the Net of VAT

To calculate the net amount from a gross total (i.e. when VAT is already included), divide the gross amount by 1.2 (for standard 20% VAT).

Example: Gross price = £240
VAT rate = 20%
Net = £240 ÷ 1.2 = £200
VAT = £40

If you’re quoting a net price and want to calculate the VAT to add, multiply the net figure by 0.20 (for 20%).

Example: Net = £100
VAT = £100 × 0.20 = £20
Gross = £120

What Is a VAT-Registered Business?

A VAT-registered business must charge VAT on most sales and pass this on to HMRC through quarterly VAT returns. It can also reclaim VAT on business-related purchases, provided valid VAT invoices are held.

If you are VAT registered and your customer is also VAT registered, quoting prices net of VAT is acceptable, especially in B2B transactions. If selling to the public, you’ll usually show VAT-inclusive (gross) pricing, as required by consumer protection laws.

Responsibilities of a VAT-Registered Business

As a VAT-registered business, you must:

• Charge VAT at the correct rate

• Provide valid VAT invoices for sales

• Submit VAT returns (usually quarterly)

• Pay any VAT due to HMRC by the deadline

• Keep detailed VAT records for at least 6 years

Failing to follow VAT rules can lead to penalties or interest on underpaid tax.

Should I Use Net or Gross on an Invoice?

This depends on your audience:

• For business customers, showing net prices with VAT added is standard and helps them reclaim input VAT.

• For consumers, prices must usually be shown inclusive of VAT under pricing regulations.

A clear VAT invoice should always display:

• The net price

• The VAT amount

• The gross total

• Your VAT registration number

This ensures transparency and compliance with HMRC’s VAT invoice requirements.

Final Thoughts

‘Net of VAT’ simply means the price shown excludes VAT. It’s commonly used in business transactions where the buyer is also VAT registered and will reclaim the tax. For general consumers, gross (VAT-inclusive) pricing is more familiar.

Always be clear whether your pricing is net or gross, especially when quoting or invoicing. And if you’re VAT registered, make sure your documentation clearly shows the VAT element so your customers – and HMRC – know exactly what’s being charged.