My margin looks higher than reality; is it because I enter the price with VAT included?

How the margin gets inflated

Your store shows shoppers the final price, say 115 including VAT. It is natural to copy that figure straight into the calculator. But if the rate you apply is 15%, the price before tax is 100 and the tax is 15. The calculator cannot know that; it only works with the two numbers you type.

The gap is 15 on every unit, exactly the VAT. The first figure makes you think you have room for a 30% discount, when in truth anything above 20% puts you into a loss.

The right way, step by step

1. Open the VAT calculator and set the operation to 'Extract tax from a gross amount'.
2. Enter the final price the customer pays and the rate that applies to your business.
3. Take the net price it returns. In our example, 115 at 15% gives a net of 100 and tax of 15.
4. Enter that net figure as the selling price in the Profit margin calculator, with your cost.

What about the cost side?

The rule is to keep cost and price on the same basis. If you are VAT-registered and reclaim the VAT you paid on purchases, your real cost is the purchase price before tax. If you cannot reclaim it, the VAT you paid is genuinely part of your cost. That depends on your tax position, so check it with your accountant if you are unsure.

The other common mistake is the reverse: a cost that includes reclaimable VAT set against a net price. Then your margin looks lower than it is, and you may raise prices for no reason.

Signs you are making this mistake

• The calculator's margin is clearly higher than what your month-end profit shows.
• You copy prices from your store's product pages, which display them VAT-inclusive.
• The gap between expected and actual margin is roughly the same across all products, which is what a flat rate like VAT does.

And if you do not charge VAT to your customers at all, your final price is your net price and this mistake does not apply to you.