Input VAT and output VAT explained

What is output VAT?

Output VAT, also called output tax, is the VAT a business charges and collects from its customers on goods or services it supplies. It applies if the business is registered for VAT. ^[1]

On the VAT return, output VAT is reported in box 1, which covers VAT due in the period on sales and other outputs. ^[1]

What is input VAT?

Input VAT, also called input tax, is the VAT a business pays to its suppliers on goods and services bought for the business, which it can claim back if it is registered for VAT. ^[1] On the return it goes in box 4, the VAT reclaimed on purchases and other inputs. ^[1]

There are conditions. A business cannot claim input VAT on its return without a proper VAT invoice to support the claim. ^[1] GOV.UK also says VAT cannot be reclaimed using an invalid invoice, a pro-forma invoice, a statement or a delivery note, and that a business cannot claim more VAT than is shown on a valid VAT invoice. ^[4]

Box 4 must not include VAT paid on goods bought wholly for personal use or on business entertainment. If a business makes both taxable and exempt supplies, it is classed as partly exempt and the partial exemption rules limit how much input VAT it can recover. ^[1]

How do input VAT and output VAT fit together?

A VAT-registered business reports the VAT it charged its customers and the VAT it paid to other businesses on its VAT return, usually every 3 months. ^[2] The VAT it pays is usually the difference between the two. If it charged more than it paid, it pays the difference to HMRC. If it paid more than it charged, HMRC will usually repay the difference. ^[2] The VAT cash accounting scheme changes when these amounts are counted and has its own guide.

On the form, box 5 is the difference between box 3 (total VAT due) and box 4 (VAT reclaimed). If box 3 is more than box 4, the difference is payable. If box 3 is less, HMRC credits the account and repays the balance, subject to any enquiries. ^[1]

Can you give me an example?

GOV.UK's own examples use the standard rate of 20%. ^[3]

• Output VAT. A business sells a chair for £60 and adds 20% VAT. The VAT-inclusive price is £72, so the output VAT is £12. ^[3]
• Input VAT. A business buys a table for £180 including 20% VAT. The price without VAT is £150, so the input VAT it may be able to claim back is the £30 difference. ^[3]

On a VAT return, the £12 would sit in box 1 and the £30 in box 4, and the business would be due a repayment for the period if those were its only transactions. ^[1]

How do I calculate VAT input and VAT output?

There are three rates of VAT: standard, reduced and zero. VAT rates can change, and a business must apply any change immediately from the date it takes effect. ^[3] The standard rate is currently 20% and applies to most goods and services, the reduced rate is 5% and the zero rate is 0%. ^[5]

To add the standard rate, multiply the price excluding VAT by 1.2. To take it out, divide the price including VAT by 1.2. For the reduced rate, use 1.05 instead. ^[3]

Is input VAT a debit or a credit?

In most bookkeeping systems, output VAT is recorded as an amount owed to HMRC (a credit) and input VAT as an amount recoverable from HMRC (a debit). GOV.UK describes VAT through the VAT account and the VAT return, not as ledger entries, so a bookkeeper or accountant can confirm how a company's own system codes each one. Our guide to bookkeepers and accountants explains who usually does what.

GOV.UK says a VAT-registered business must keep a VAT account that records the VAT charged on sales and the VAT paid on purchases. It must show total VAT sales, total VAT purchases, the VAT owed to HMRC and the VAT that can be reclaimed. ^[4]

Who has to charge output VAT?

A business has to register for VAT if its VAT taxable turnover is more than £90,000, and it may choose to register if its turnover is below that. ^[2] Only a VAT-registered business can issue a VAT invoice. ^[4]

Because VAT figures flow into a legal return, a specialist can check how a particular company should treat items such as mixed-use purchases, imports or partly exempt income. If you would like a second check, help with VAT returns could identify items worth reviewing before a return is filed.