Input VAT and Output VAT Explained
When it comes to reporting standard VAT businesses need to consider two types of value added tax: Input VAT and Output VAT.
Understanding how both input and output VAT works and the effect they can have on each other is valuable for any business owner.
HMRC needs your business to report input and output VAT accurately on your VAT return and submit it on time to avoid VAT penalties and surcharges.
If the amount of VAT paid a business exceeds the amount of VAT collected the business can typically receive a refund of the difference from HMRC.
Input VAT and output VAT extends beyond just tax compliance with proper management helping businesses improve cash flow, cost management and generating revenue.
Our input and output VAT guide explains and how they are both reflected in your accounts and the fundamentals needed to meet the making tax digital for VAT requirements.
What is input VAT?
Input VAT is also known as input tax and refers to the value added tax that a business pays on its purchases of goods and services.
The term ‘input’ signifies that this VAT is incorporated into the business’s operations.
Essentially input VAT represents the amount of VAT that a business automatically pays when acquiring goods and services from other businesses.
Input VAT holds significant importance in the general functioning of businesses, as it enables them to reduce their overall tax liability by deducting it from the output VAT.
In order to calculate Input VAT, businesses must gather invoices and receipts, verify the VAT information and add up the corresponding amounts.
What is output VAT?
Output VAT is also referred to as output tax and is the amount that a business registered for VAT adds to the price of its goods and services when selling them to customers.
For VAT purposes output VAT represents the tax that is transferred out of a business when it makes a taxable transaction with its customers.
This VAT is collected by the business on behalf of the government and subsequently paid to HMRC.
Businesses are required to charge output VAT on taxable supplies using the appropriate VAT rate that corresponds to the specific type of goods or services provided.
The VAT rate may vary depending on the nature of the goods or services sold and includes a standard rate and a reduced rate.
Calculating output VAT involves determining sales revenue, applying the appropriate VAT rate, and calculating the amount of VAT owed to HMRC.
What happens if output VAT is more than input VAT?
If the VAT you owe is higher than the VAT you can reclaim you will need to pay the difference to HMRC (or appropriate tax authorities).
This type of VAT return is known as a tax due return and in this scenario the value added tax payable on the overall sales of goods or services exceeds the VAT that can be claimed back on business purchases.
What happens if input VAT is more than output VAT?
If the VAT you can reclaim exceeds the VAT you owe you will be entitled to receive a repayment of VAT from HMRC (or other relevant tax authority).
This normally happens when businesses find themselves making more purchases than sales meaning they may have a higher amount of VAT to deduct from their purchases compared to the VAT owed on the sales of goods or services.
In this situation the VAT return will be known as a repayment return and show the business to be in a credit position.
Instead of requesting the credit as a refund another option is to carry forward the credit amount and use it to offset any future VAT liabilities.
VAT refund tip:
You typically have the option to reclaim the VAT that you paid on goods or services before you became registered for VAT.
This applies to goods that you still possess and have used in the process of making taxable supplies within the last four year and for services you can usually claim back VAT if they were purchased within the last six months.
VAT record keeping
Most businesses meet the criteria for making tax digital for VAT which demands that records are kept digitally for both input and output VAT for a period of six years.
It’s essential to maintain a detailed record of the VAT charged on your sales and the VAT paid on your purchases.
This record is commonly referred to as a “VAT account” which provides the figures used to complete your VAT return.
HMRC needs you to keep an electronic record of pretty much everything you need to complete your VAT return including:
- The VAT you have collected from supplies received.
- The VAT you paid on supplies made.
- Time of supply on all supplies made and received.
- Value of supply excluding VAT on all supplies made and received.
- VAT accounting schemes used.
- Reverse charge transactions.
- VAT return adjustments.
- Reclaimable items relating to the use of the VAT flat rate scheme.
- Daily gross takings if using the VAT retail scheme.
Entering input and output VAT on your VAT return
When filing your VAT return it’s crucial to accurately reflect the deduction of input VAT from the output VAT for the same period.
This ensures that businesses only pay the net VAT amount, preventing any overpayment or underpayment of taxes and aiding in the management of output tax.
Input VAT is usually entered in box 4 of your VAT return under the heading VAT reclaimed in the period on purchases and other inputs (including acquisitions from the EU).
Output VAT is usually entered in box 1 of your VAT return under the heading VAT due in the period on sales and other outputs.
A VAT return has multiple other boxes which may have to be completed depending on factors like the type of VAT scheme used.
How to pay your VAT bill to HMRC
Paying your VAT bill to HMRC on time is important to prevent automatic penalties and surcharges.
You can use the HMRC VAT payment deadline calculator to help you work out the payment date for your accounting period.
The most common way of paying a VAT bill is online using one of the digital options provided by HMRC like direct debit, online banking and online payment.
