Short answer: without VAT. Margin measures what your business keeps, and VAT is not yours to keep — you collect it from the customer on the government's behalf and pass it on, minus the VAT you already paid your suppliers. So the honest margin is always worked out on net, ex-VAT figures. The interesting part is when calculating on gross prices gives you the same answer anyway, and when it quietly tells you a flattering lie.
Calculate margin with VAT →Why VAT stays out of margin
When you sell something for 120 including 20% VAT, 20 of that belongs to the tax authority from the moment the customer pays. When you bought the goods for 60 including VAT, the 10 of VAT inside that cost comes back to you as a credit against what you owe. Neither amount is revenue or cost of your business — they are money passing through it.
That is why accountants, lenders and marketplaces all read margin on net figures: revenue without VAT, cost without VAT. The formula itself is the familiar one:
- Profit = net price − net cost
- Margin % = profit ÷ net price × 100
- Markup % = profit ÷ net cost × 100
To get a net figure from a VAT-inclusive one, divide by (1 + VAT rate): 120 ÷ 1.2 = 100. Do not subtract 20% — that gives 96 and understates the net price.
A worked example
You buy an item for 60 including 20% VAT and sell it for 120 including VAT.
- Net cost: 60 ÷ 1.2 = 50
- Net price: 120 ÷ 1.2 = 100
- Profit: 100 − 50 = 50
- Margin: 50 ÷ 100 = 50%; markup: 50 ÷ 50 = 100%
- VAT you actually remit: 20 collected − 10 reclaimed = 10
Notice the profit. Subtracting gross from gross suggests you make 60 per item; you really make 50. The extra 10 is the VAT you owe on the value you added, and a business that plans spending around the gross figure finds out at the next VAT return.
When the gross shortcut happens to work
Run the same example on gross prices: (120 − 60) ÷ 120 = 50%. The percentage is identical. That is not a coincidence — when both the price and the cost carry VAT at the same rate, dividing both by 1.2 cancels out in the ratio.
So the gross shortcut gives the right margin percentage only when all three hold: you are VAT-registered and reclaim input VAT, your supplier charged VAT, and both sides use the same rate. The absolute profit is still overstated by the VAT you owe, so never use gross profit for cash planning, pricing floors or a break-even calculation.
Where mixing gross and net inflates your margin
The expensive mistakes happen when one side has VAT and the other doesn't. The most common case: you are VAT-registered and sell with VAT, but buy from a small supplier who is not registered and charges no VAT.
Say you pay 60 with no VAT and sell for 120 including 20% VAT. The gross shortcut says (120 − 60) ÷ 120 = 50%. The real figures are net price 100, net cost 60, profit 40 and a margin of 40%. Ten points of margin that never existed — on every sale, until someone reconciles the books.
The mirror case catches small sellers who are not VAT-registered. You cannot reclaim the VAT your supplier charged, so for you it is simply part of the cost: use the full VAT-inclusive purchase price as the cost, and your selling price has no VAT in it. Stripping VAT out of the cost here would flatter the margin in the other direction.
Different rates on each side
Rates can differ even when both sides are taxed: goods bought at a reduced rate and sold at the standard rate, or a bundle with mixed items. The gross shortcut breaks again, because the two divisions no longer cancel. Convert each side with its own rate, then compute margin on the two net numbers.
Rates also change. When a country raises its VAT rate, a seller who keeps the same shelf price absorbs the increase entirely out of margin — worth recalculating the day the new rate applies rather than at the end of the quarter.
How to use the calculator
Enter the cost and the selling price, set the VAT rate, and tick the box if both figures include VAT. The calculator converts both to net, then shows margin, markup, profit per unit and the VAT you remit on the difference.
For a mixed case — say a supplier with no VAT and a selling price with VAT — convert the price to net yourself first (divide by 1 + rate), untick the box, and enter both numbers as net. You can then share the link to the result so a partner or accountant sees exactly the same figures.
Frequently asked questions
Is margin calculated with or without VAT?+
Without VAT. VAT is collected for the government and passed on, so it is neither your revenue nor your cost. Calculate margin as (net price − net cost) ÷ net price, where both figures exclude VAT.
Why does margin come out the same with and without VAT?+
Because when price and cost both include VAT at the same rate, dividing each by (1 + rate) cancels out in the ratio. The percentage matches, but the profit in money does not — the gross figure is overstated by the VAT you owe.
How do I remove VAT from a price?+
Divide by (1 + VAT rate). At 20%, 120 ÷ 1.2 = 100 net, and the VAT is 20. Subtracting 20% of 120 (giving 96) is a common mistake that understates the net price.
I am not VAT-registered — how do I calculate margin?+
Use the full price you paid the supplier, VAT included, as your cost, because you cannot reclaim that VAT. Your selling price carries no VAT, so margin is simply (price − full cost) ÷ price.
What is the difference between margin and markup?+
Both use the same profit, but margin divides it by the selling price and markup divides it by the cost. A 100% markup is a 50% margin. Margin can never reach 100%; markup can be any size.
The iznkit editorial team builds and documents free, no-sign-up tools for freelancers, small businesses and developers — and writes these guides to go with them.
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