VAT inclusive means VAT is already included in the price. VAT exclusive means the price is before VAT, so any VAT due is added. For a UK purchase taxed at 20%, £100 exclusive becomes £120 payable. A price of £120 inclusive already contains £100 net and £20 VAT. Whether you can reclaim the VAT is a separate question.
The abbreviations describe the same two price bases:
| Price wording | Meaning | Amount payable for this purchase at 20% VAT |
|---|---|---|
| £100 ex VAT, excl VAT or exclusive of VAT | VAT is excluded | £120 |
| £100 plus VAT or £100 + VAT | Add the VAT due | £120 |
| £120 inc VAT, incl VAT or inclusive of VAT | VAT is included | £120 |
In this VAT context, net is the amount before VAT and gross is the amount including VAT. A £100 net price and a £120 gross price therefore describe the same purchase at 20%. The word net here concerns the price, rather than payment terms such as net 30, which concern when payment is due.
VAT at 20% is calculated on the net amount. The VAT inside an inclusive price is consequently one-sixth of that price: £120 ÷ 6 = £20. Taking 20% of £120 would give £24, which is the wrong VAT amount. HMRC explains this distinction in its guidance on VAT fractions.
An ex-VAT label does not establish the tax rate. Check the rate applicable to the purchase; 20% is the current UK standard rate, but other rates and treatments exist.
Reading VAT on prices, invoices and receipts
A consumer-facing price should show what the customer has to pay. The CMA guidance on displaying the total price says an invitation to purchase must give the total price, normally including unavoidable charges such as VAT. Where the nature of the product prevents the total being calculated, the information needed to calculate it must be equally prominent.
Trade price lists and business quotes may instead show an exclusive figure, making the amount before VAT visible. That convention does not remove consumer pricing obligations when an advertisement also reaches consumers. Read the stated VAT basis rather than infer it from the type of seller.
On a full VAT invoice, look for the amounts excluding VAT, the VAT charge and the total payable. In the continuing purchase, these are £100, £20 and £120 respectively. Copying the subtotal into a payment record would understate what is owed; adding VAT to the £120 total would overstate it.
Some VAT invoices present inclusive amounts:
- Simplified VAT invoices can be used for eligible supplies of £250 or less, including VAT. They show the total including VAT for each applicable rate and the rate itself.
- Modified VAT invoices for qualifying retail sales can show VAT-inclusive line values with the customer's agreement. HMRC's rules for retail invoices over £250 explain the separate totals still required.
The UK VAT invoice requirements for full, simplified and modified invoices set out the format conditions and fields. A retail receipt showing £120 inclusive is recording a £120 charge; it is not an instruction to add another £20.
Does a quote include VAT if it is not stated?
Do not assume that a quote silent on VAT either permits or rules out an extra charge. Check the wording you accepted, any terms incorporated into the quote and the correspondence confirming the price. A condition stating that prices exclude VAT may sit outside the price line itself.
If a supplier quotes £100 without a VAT label, ask them to confirm two things in writing: whether VAT is included and the total you will have to pay. For a purchase taxed at 20%, £100 exclusive means £120 payable; £100 inclusive means the payable amount stays £100. Those are different offers, even though the headline number is identical.
Resolve that ambiguity before accepting the quote. If an invoice has already arrived with unexpected VAT added, ask the supplier to identify the agreed term supporting the increase, or to correct the invoice if it does not match the agreement. Keep the original quote and acceptance alongside the reply.
Understanding the difference between a quotation and an invoice helps here: the quote states the proposed price and terms, while the invoice requests payment. A later invoice showing an extra tax amount does not, by itself, explain why the price agreed earlier has changed.
Entering VAT-inclusive or VAT-exclusive amounts in accounting software
The inclusive or exclusive setting tells the software how to interpret the amount you enter. For an ordinary purchase entry at 20%, it must match the figure copied from the invoice:
| Amount entered | Entry basis | Net amount | VAT at 20% | Resulting total |
|---|---|---|---|---|
| £100 | Exclusive | £100 | £20 | £120 |
| £120 | Inclusive | £100 | £20 | £120 |
| £120 | Exclusive, incorrectly | £120 | £24 | £144 |
The first two rows record the same purchase correctly. Use £100 on an exclusive basis when copying its net value, or £120 on an inclusive basis when copying its gross value. Entering the £120 gross amount as exclusive adds VAT a second time, creating a £144 bill that does not match the supplier's £120 invoice.
Check the tax code as well as the amount basis. Inclusive/exclusive determines whether tax is inside the supplied number; it does not decide which rate applies, whether VAT is recoverable or whether the transaction is outside the scope of VAT. A buyer's inability to reclaim VAT does not make the supplier's taxed sale an outside-scope transaction.
Before saving the entry, compare the resulting payable total with the document and check any VAT split against the supplier's figures. If either differs, review the amount entered, the inclusive/exclusive setting and the tax treatment before changing the numbers to make them fit.
Recording the purchase when VAT can or cannot be reclaimed
The supplier is owed £120 for the example purchase regardless of whether the buyer can recover its £20 VAT. What changes is how the buyer records that £120:
| Buyer's position | Purchase cost recorded | Recoverable input VAT | Supplier payable |
|---|---|---|---|
| VAT-registered, with all £20 recoverable | £100 | £20 | £120 |
| Ordinary business not VAT-registered | £120 | £0 | £120 |
| VAT-registered, with none of the £20 recoverable | £120 | £0 | £120 |
For a fully recoverable purchase, £100 goes to the relevant expense or asset account and £20 to input VAT. If VAT cannot be recovered, it remains part of the purchase's cost. Whether that cost is an expense or an asset depends on what was bought, not on the inclusive label.
For a business that is not VAT-registered, a VAT-inclusive expense therefore normally goes into the books at the gross amount. Do not strip out £20 as recoverable VAT merely because the supplier's invoice identifies it.
VAT registration alone does not guarantee recovery on every purchase. HMRC's guidance on reclaiming VAT on business expenses explains the business-use and invoice-evidence requirements. Personal use and partial exemption can restrict recovery. Where only part of the VAT is recoverable, record that part as input VAT and leave the unrecovered part in the purchase cost.
The buyer's registration and the supplier's registration have different consequences. A non-registered buyer can still pay VAT charged by a registered supplier. A supplier that is not VAT-registered must not add a VAT charge: HMRC's guidance on charging VAT requires registration before a business starts charging it.
Can you invoice a whole-number price inclusive of VAT?
Yes. You can agree a whole-number VAT-inclusive selling price. At 20%, an agreed £120 inclusive price contains £100 net and £20 VAT. The customer owes £120, with no further VAT added on top.
Choosing a round payable amount does not remove the invoice information required for the applicable format. A full VAT invoice must still give its net amounts and VAT charge; writing “VAT inclusive” beside a total is not a substitute for those fields. An eligible simplified invoice can present inclusive totals and the applicable rates instead.
A whole-number selling price also does not guarantee whole-number net and VAT components. For reverse calculations, invoices containing mixed rates or penny differences between calculated and printed amounts, use the guide to calculate net and VAT from gross invoice totals in Excel.