Tax showing incorrectly on orders

[Kirstie2]

Hello Shopify Community,

I'm just about to open my first shop and ran a test order to ensure everything was ok. The item I bought was £45 with free shipping to the UK. The UK is noted on my admin as 20% tax and I have ticked to include tax in order price so that the customer is charged £45 and no more. The tax is split out on the order confirmation email but is showing as £7.50. It's also showing as £7.50 on my Tax Summary page in admin. However 20% of £45 is £9. I hope I'm not asking a silly question, but I'd love to know why it shows as £7.50 rather than £9?

Thanks so much,

Kirstie

[Cafswish · Accepted solution]

VAT is caculated at 20% of the net price, not 20% of the gross price. To reverse calculate VAT from gross, divide by 6. So if selling at £45 including VAT, £7.50 is the correct amount of VAT.  
Is the new shop for a new business? If so do you know about VAT threshold? You don’t have to worry about VAT until turnover is over threshold unless you choose to register for VAT earlier. 

Good luck with your venture.

[Kirstie2]

Hello Cafswish,

Thank you so much for your reply, this is very helpful.

Best wishes,

Kirstie

[Victor]

Hi @Kirstie2,

@Cafswish is absolutely correct here and VAT is calculated in the manner in which they have described. You can use online VAT calculators, such as this one, that help you calculate the pre-VAT price when tax is included in the price of the product:

As @Cafswish also mentioned, you likely won't need to collect taxes on your products if you're not at or approaching the threshold the UK government requires you to register for VAT at. I'd recommend checking our dedicated taxes thread for merchants based in the UK, which includes resources that should help with regards to understanding your tax obligations and setting your Shopify store settings accordingly.

If you've any other questions, please let me know.

Kind regards,

Victor | Shopify Social Care