How VAT on Sale and VAT on Cost are calculated
The VAT rate in UK is 20% but applies to net prices, (the total gross price is calculated by adding 20% to the VAT-exclusive price).
So you pay VAT on the sale price and can reclaim the VAT paid on the cost; excluding the Amazon's VAT on Fees SAS calculates the VAT due as: VAT on Sale - VAT on Cost
For example:
The sale price is £20.00 so the VAT to be paid from the sale price is £3.33
The pre-VAT/net price is calculated by dividing the sale price by 1.2 (20.00 / 1.2 = 16.66)
The pre-VAT price is then multiplied by 20%/0.2 to find the VAT on sale which can be reclaimed (16.66 * 0.2 = £3.33)
If we then apply the same logic to the Cost Price (£6.00), the VAT which you can reclaim is £1.00. The net cost would be £5.00 (6.00 / 1.2) + £1.00 (VAT at 20% of £5), so a VAT inclusive cost of £6.00
Therefore the VAT due is £3.33 - £1.00 which is £2.33
This is not tax advice. We recommend consulting with your tax professional to understand how VAT works