What is VAT-inclusive pricing?

UK consumers expect the price on the menu or the tag to be the price they pay. So if you are VAT-registered, the VAT is inside the price — and part of every £4 coffee is not yours. VAT-inclusive pricing is simple for customers and easy to get wrong in your own numbers.

Taking VAT out of a price

At the 20% standard rate:

Price before VAT = price including VAT ÷ 1.2

VAT in the price = price including VAT ÷ 6

A £4.20 flat white is £3.50 before VAT, with £0.70 of VAT in it.

For any rate:

VAT in the price = price × rate ÷ (100 + rate)

Which rate applies?

UK VAT on food and drink depends on what you sell and how — for example, many cold takeaway foods are zero-rated while hot takeaway food and food eaten in are standard-rated. The rules have detail and exceptions, so check HMRC's guidance for your products, or ask your accountant.

Why it matters

• Margins. A dish's margin must be worked out from the price before VAT, or it is overstated by the whole VAT fraction.
• Pricing. Decide the price you need before VAT, then add VAT to get the menu price — not the other way round.
• Your return. The VAT you charge has to be reported and paid, split by rate.

A worked example

You want a 70% margin on a dish costing £2.40. The price before VAT is £2.40 ÷ 0.30 = £8.00. Add 20% VAT and the menu price is £9.60. Price it at £8 including VAT by mistake and your margin falls to 64%.

Common mistakes

1. Working margins from the menu price. See margin vs markup and gross profit margin.
2. One rate for everything. Mixed menus can carry more than one rate.
3. Rounding before adding VAT. Set the menu price you want, then check what is left after VAT.

Tracking it in DUMA

DUMA takes VAT out of the selling price when it works out an item's margin, if your business is VAT-registered — so the margin matches what you keep. The VAT report shows the VAT charged on your sales, split by rate, for your return.