Margin and VAT Calculator

Background.

Most pricing mistakes in a small business come from two percentages that sound alike. Margin is profit as a share of the selling price; markup is profit as a share of cost. Add 40% to an item that costs 60 and you charge 84, but your margin is only 28.6%, because the 24 of profit is measured against 84, not 60. To keep 40% of every sale you have to divide the cost by 0.6, which gives 100.

VAT then sits on top of that price, and it is not yours. A VAT-registered seller collects it from the customer, offsets the VAT paid on purchases, and pays the difference over to the tax authority. That is why margin is worked out on prices excluding VAT, and why the cost you enter should also be net of any VAT you can reclaim. Comparing a VAT-inclusive price with a net cost flatters the result: 116 against a cost of 60 looks like 48%, while the real margin is 40%.

The page takes the two steps in order. It finds the net price that delivers your target gross margin, then multiplies by one plus the VAT rate to give the price a customer pays at the till or on the invoice. Both figures appear, so you can quote either.

It is a pricing aid, not tax advice. You supply the VAT rate, and the page takes no view on whether your goods are standard-rated, zero-rated or exempt, whether you must register, or how invoices should be rounded. Gross margin also means price minus the cost you enter, so freight, packaging or card fees only count if you add them to that cost.

What is margin and vat calculator?

Gross margin is the share of the net selling price left after the cost of the goods sold: (price − cost) ÷ price. Setting it as a target and solving for price gives net price = cost ÷ (1 − margin). The VAT-inclusive price is that net price increased by the VAT rate, which is what a final customer actually pays. Because margin is measured against price, it can approach 100% but never reach it, unlike markup, which has no ceiling.

How to use this calculator.

1. 01Enter the cost of one unit excluding VAT: the purchase price plus anything else the margin has to cover, such as freight or packaging. If you are VAT-registered, leave out the input VAT you will reclaim.
2. 02Enter the gross margin you want as a percentage of the net selling price. It must be above 0 and below 100, since a 100% margin would imply goods that cost nothing.
3. 03Enter the VAT rate you charge on this item. The default 16% is Kenya's standard rate; check the rate that applies to your product and country. The field needs a rate above zero, so for zero-rated or exempt goods use the price excluding VAT as your selling price.
4. 04Read the price excluding VAT for invoices and margin tracking, and the VAT-inclusive price for shelf labels and consumer quotes. If you round to a price point afterwards, check how far the rounding moves your margin.

The formula.

Two steps. First, net price = cost ÷ (1 − m), where m is the target margin as a decimal. This follows from the definition of margin: if m = (price − cost) ÷ price, then price × (1 − m) = cost. Second, VAT-inclusive price = net price × (1 + v), where v is the VAT rate as a decimal. VAT is charged on the whole net price, profit included, so it raises what the customer pays without changing your margin. The margin step is the sensitive one. Because it divides by (1 − m), each extra point of margin costs more than the last: on a cost of 60, a 30% margin needs a net price of 85.71, 40% needs 100, 60% needs 150 and 80% needs 300. The VAT step is linear by comparison; one more point of VAT adds exactly 1% of the net price to the gross price.

A worked example.

Frequently asked questions.

References& sources.

1. [1]OECD, International VAT/GST Guidelines.
2. [2]IFRS Foundation, IAS 2 Inventories.
3. [3]BIPM, The International System of Units (SI Brochure), 9th ed., version 3.01, coherent derived units and quantity equations.