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Travel companies mostly quote prices with VAT included. Especially in Europe. That’s perfect, isn’t it? I mean, that’s how it should be. We want to know the final amount we’re supposed to pay, right? But if you’re a corporate traveler, you would want the detailed breakdown of the final price. You want to know the price before VAT and the VAT amount. Why? Because in corporate books of accounts, the final price is not the travel expense. Instead, it’s the price before VAT that enters the books of accounts as an expense. That’s because the VAT amount paid on travel expenses is generally available for refund or credit. How can something be an expense if the company can get a refund for it?
Makes sense?
Take the aforesaid example: if the travel bill says a total amount of $150 including a VAT of 8%. You would want to know the price before tax or the base price because, from an accounting point of view, that’s your travel expense and not $150 because you would get credit or refund for VAT you paid.
The formula to calculate the travel price before VAT is: Price Including Tax / (1 + VAT rate/100).
That’s it. Now, how did we arrive at this formula? Let me explain.
Let’s say the price before tax is €100. Assuming a VAT rate of 8%, what’s the price including or after tax? Yes, that’s €108, right? So, what did we do here? We calculated the VAT on €100 and then added the VAT to €100 to arrive at the final price, or price including tax, i.e. €100 + (€100 x 8%). The formula to calculate the price including tax here is Price Before VAT + (Price Before VAT x VAT%). Now, factoring the common element (Price Before VAT), we can simplify this formula to: Price Before VAT x (1 + VAT%) or Price Before VAT x (1 + VAT rate/100).
Price Including Tax = Price Before VAT x (1 + VAT rate/100).
Now, reverse this formula.
Price Before VAT = Price Including VAT / (1 + VAT rate/100).
150 / (1 + 0.08) = €138.89
Simple, right?