What Is Input and Output VAT?

Many businesses struggle to understand the difference between input and output VAT, leading to costly tax errors and compliance issues. This confusion can result in missed refunds or penalties from tax authorities. Here’s a simple breakdown to help you grasp both terms and stay VAT-compliant.

What Is Input VAT?

Input VAT (also known as input tax) is the Value Added Tax you pay on purchases made for your business. It’s called “input” because it flows into your business through expenses like:

• Office equipment
• Raw materials
• Digital software subscriptions
• Rent, utilities, and professional services

What Is Output VAT?

Output VAT (also known as output tax) is the VAT you charge your customers when selling goods or services. It’s the tax you collect on behalf of the government.

Example: You sell a laptop for £1,000 + 20% VAT = £1,200. That £200 is your output VAT.

Output VAT doesn’t belong to your business—it must be remitted to HMRC or your local tax authority as part of your VAT return.

Key Difference Between Input and Output VAT

Feature	Input VAT	Output VAT
Meaning	VAT paid on business purchases	VAT charged on sales to customers
When It Occurs	During buying of goods/services	During the buying of goods/services
Purpose	Can be claimed back to reduce tax liability	Must be paid to the tax authority
VAT Return Role	Deducted from output VAT	Declared and submitted in full
Examples	Office rent, supplies, and software	VAT is charged on sales to customers

How to Calculate Input VAT

To accurately calculate input VAT for your business, follow these simple steps to ensure your VAT return is correct and compliant with tax regulations:

• Collect all purchase invoices that include VAT details.
• Ensure each invoice shows the supplier’s VAT number.
• Confirm that the expenses are for taxable business activities.
• Add up the VAT amounts from all valid invoices.
• The total is your input VAT for that VAT return period.

Note: Only claim input VAT on business-related, taxable expenses. Personal or exempt purchases are not eligible

How to Calculate Output VAT

To work out your output VAT for a specific period, follow these simple steps to stay compliant and ensure accurate VAT reporting:

• Log all taxable sales your business made during the VAT period.
• Apply the correct VAT rate to each sale based on the type of goods or services.
• Multiply the sale amount by the applicable VAT rate to calculate the VAT for each transaction.
• Add up all the VAT amounts collected—this gives you your total output VAT.

Note: Different goods or services may have different VAT rates, such as standard, reduced, or zero-rated. Always double-check the correct rate for each item.

How to Know If You Need to Pay or Claim VAT

To calculate your VAT position

VAT Payable or Refundable = Output VAT – Input VAT

• If Output VAT is more than Input VAT, → You owe the difference to the tax office (HMRC).
• If Input VAT is more than Output VAT, → You’re entitled to a VAT refund or can carry it forward.
• If both are equal, → No VAT to pay, but you still must submit your return.

Real-Life Examples of VAT Calculations (Input & Output VAT)

Examples	Purchases (Input VAT)	Sales (Output VAT)	VAT Outcome
Input VAT < Output VAT	£1,000 + £200 VAT	£2,000 + £400 VAT	Pay £200 to HMRC (£400 – £200)
Input VAT > Output VAT	£2,000 + £400 VAT	£1,000 + £200 VAT	Claim £200 refund from HMRC (£400 – £200)
Input VAT = Output VAT	£1,500 + £300 VAT	£1,500 + £300 VAT	No VAT payable, but return must be filed

Common Mistakes That Lead to Input VAT Rejections

To successfully reclaim input VAT, businesses must follow certain rules. A claim may be denied for the following reasons:

• No valid VAT invoice is provided with the required details, such as the supplier’s VAT number.
• The purchase was for personal or non-business use, which is not eligible for VAT recovery.
• VAT was claimed on exempt goods or services, which cannot be recovered.
• The VAT rate applied was incorrect or miscalculated.
• The VAT return was filed late or contains errors, or has inconsistencies.

It is important to keep all VAT-related records and valid invoices for at least six years, and regularly check the VAT rules in your country to ensure full compliance.

Frequently Asked Questions