How is VAT calculated from the net and gross values?

How is VAT calculated from the net and gross values?

• A. Gross value / Net value
• B. Net value / Gross value
• C. Gross value - Net value
• D. Net value + VAT

Answer: (A)

When you look at net, gross, and VAT, the key idea is that gross is the net amount plus the VAT. The number that tells you how much the gross is relative to the net is found by dividing gross by net. This ratio, the VAT factor, equals 1 plus the VAT rate. So dividing gross value by net value gives you the factor that includes VAT, which you can then use to find the VAT amount or the rate. For example, if net is 100 and gross is 120, gross divided by net is 1.2. That means the VAT factor is 1.2, the VAT amount is 120 − 100 = 20, and the VAT rate is 20%. The other options don’t give you that multiplicative factor directly: subtracting net from gross gives the VAT amount itself, not the factor; dividing net by gross yields a small fraction, not a useful VAT multiplier; and adding VAT to the net is just the definition of gross, not a calculation from the two values.

When you look at net, gross, and VAT, the key idea is that gross is the net amount plus the VAT. The number that tells you how much the gross is relative to the net is found by dividing gross by net. This ratio, the VAT factor, equals 1 plus the VAT rate. So dividing gross value by net value gives you the factor that includes VAT, which you can then use to find the VAT amount or the rate.

For example, if net is 100 and gross is 120, gross divided by net is 1.2. That means the VAT factor is 1.2, the VAT amount is 120 − 100 = 20, and the VAT rate is 20%.

The other options don’t give you that multiplicative factor directly: subtracting net from gross gives the VAT amount itself, not the factor; dividing net by gross yields a small fraction, not a useful VAT multiplier; and adding VAT to the net is just the definition of gross, not a calculation from the two values.