What Is the Difference Between Input VAT and Output VAT?

This is one of the very first VAT concepts every business encounters, and yet it is also one of the most commonly misunderstood. I regularly speak to business owners who know they pay VAT and charge VAT, but are not fully clear on what input VAT and output VAT actually mean, or how the two interact on a VAT return.

Understanding the difference between input VAT and output VAT is essential, not just for completing VAT returns correctly, but for managing cash flow, pricing properly, and avoiding penalties. In this article I will explain both concepts clearly, show how they work together in practice, and highlight the areas where mistakes most often occur. Everything here reflects current UK VAT rules as applied by HM Revenue & Customs and guidance published on GOV.UK, combined with real world experience of advising VAT registered businesses.

The big picture of how VAT works

Before diving into definitions, it helps to step back and look at VAT as a whole.

VAT is a tax on consumption. Businesses act as collectors of VAT on behalf of HMRC, not as the final payer, unless VAT is blocked or irrecoverable.

Every VAT registered business sits in the middle of a chain:

VAT is charged to customers

VAT is paid to suppliers

The difference is paid to or reclaimed from HMRC

Input VAT and output VAT are simply the labels used to describe VAT at different points in that chain.

What is output VAT?

Output VAT is the VAT that you charge on your sales.

It is called output VAT because it relates to the outputs of your business, meaning the goods or services you supply to customers.

Whenever you make a VAT taxable sale, output VAT arises.

Examples of output VAT include:

VAT charged on invoices you issue

VAT included in retail prices you collect

VAT charged on services you provide

VAT charged on goods you sell

If you sell something for £100 plus VAT at 20 percent, the £20 you charge is output VAT.

That VAT does not belong to you. You are holding it temporarily before paying it over to HMRC.

What is input VAT?

Input VAT is the VAT that you pay on your business purchases and expenses.

It is called input VAT because it relates to the inputs of your business, meaning the goods and services you buy to run your business.

Whenever a VAT registered supplier charges you VAT on a legitimate business expense, that VAT is input VAT.

Examples of input VAT include:

VAT on office supplies

VAT on professional fees

VAT on marketing and advertising

VAT on tools and equipment

VAT on business travel and accommodation

If you buy something for £100 plus VAT at 20 percent, the £20 you pay is input VAT.

In many cases, you are entitled to reclaim this VAT from HMRC.

The key difference in simple terms

In the simplest possible terms:

Output VAT is VAT you charge and owe to HMRC

Input VAT is VAT you pay and may reclaim from HMRC

Your VAT return compares the two.

If output VAT is higher than input VAT, you pay the difference to HMRC.

If input VAT is higher than output VAT, HMRC owes you a refund.

How input VAT and output VAT interact on a VAT return

The VAT return is designed around this difference.

On a standard UK VAT return:

Output VAT goes in Box 1

Input VAT goes in Box 4

The VAT return then calculates whether VAT is payable or reclaimable.

For example:

Output VAT of £5,000

Input VAT of £3,500

Net VAT payable of £1,500

Or:

Output VAT of £2,000

Input VAT of £3,000

VAT refund of £1,000

This comparison is the core of every VAT return.

Output VAT does not always mean 20 percent

One common misunderstanding is assuming output VAT always equals 20 percent of sales.

This is not true.

Output VAT depends on the VAT rate that applies to what you sell.

Your output VAT may include:

20 percent VAT on standard rated supplies

5 percent VAT on reduced rate supplies

0 percent VAT on zero rated supplies

Zero rated sales still count as VAT taxable, but they generate no output VAT.

This distinction becomes important when looking at reclaiming input VAT.

Input VAT is not always reclaimable

Another common misconception is that all input VAT can be reclaimed.

In reality, input VAT is only reclaimable if certain conditions are met.

To reclaim input VAT:

You must be VAT registered

The purchase must be for business purposes

The purchase must relate to taxable supplies

You must hold a valid VAT invoice

The VAT must not be specifically blocked

If any of these conditions fail, input VAT may be restricted or disallowed.

Examples of blocked or restricted input VAT

Some types of input VAT cannot normally be reclaimed.

Common examples include:

VAT on entertaining non employees

VAT on cars

VAT on personal expenses

VAT relating to exempt supplies

This is where businesses often overclaim input VAT and create problems later.

Why output VAT is often simpler than input VAT

In practice, output VAT is usually more straightforward than input VAT.

Output VAT depends mainly on:

What you sell

The VAT rate applied

The value of the sale

Input VAT, on the other hand, depends on:

The nature of the expense

Whether it is business or personal

Whether it relates to taxable or exempt activity

Whether VAT is blocked

Whether valid evidence exists

This is why many VAT errors arise on the input VAT side rather than output VAT.

Input VAT and mixed use expenses

Many expenses are partly business and partly personal.

Examples include:

Mobile phones

Vehicles

Home broadband

Electricity for home working

Laptops used privately

In these cases, only the business portion of input VAT can be reclaimed.

Reclaiming 100 percent input VAT on mixed use expenses is rarely correct.

Input VAT and partial exemption

If your business makes both taxable and VAT exempt supplies, you may be partially exempt.

In this situation:

Not all input VAT is reclaimable

Calculations are required

Exempt input VAT may be restricted

Partial exemption is one of the most technical VAT areas and often requires professional support.

Output VAT and pricing decisions

Understanding output VAT is essential for pricing.

When you register for VAT, you must decide whether:

Prices will increase by adding VAT on top

VAT will be absorbed into existing prices

Pricing structures need to change

These decisions affect:

Profit margins

Competitiveness

Customer relationships

Cash flow

Output VAT is collected from customers, but if pricing is wrong, it can quietly reduce profits.

Input VAT and cash flow

Input VAT can have a significant impact on cash flow.

For example:

Large purchases can generate VAT refunds

Import VAT can create timing issues

Flat Rate Scheme users may lose reclaim rights

Understanding when input VAT is reclaimable helps avoid cash flow surprises.

How input VAT and output VAT appear in accounting records

In bookkeeping systems:

Output VAT is recorded when sales invoices are raised

Input VAT is recorded when purchase invoices are entered

Both are tracked separately and reconciled to VAT returns.

Errors in coding invoices are one of the most common causes of VAT discrepancies.

Input VAT and VAT invoices

You cannot reclaim input VAT without proper evidence.

A valid VAT invoice must include:

Supplier name and address

Supplier VAT registration number

Invoice date

Description of goods or services

Net amount

VAT rate

VAT amount

Without this, HMRC can disallow the input VAT claim.

Output VAT and VAT invoices

Similarly, when you charge VAT, your invoices must meet VAT invoice requirements.

Failing to issue correct VAT invoices can:

Cause problems for your customers

Lead to HMRC challenges

Result in penalties

Input VAT and output VAT are two sides of the same compliance coin.

Common mistakes I see with input and output VAT

These issues appear repeatedly in practice:

Confusing turnover with output VAT

Reclaiming input VAT that is blocked

Forgetting to charge output VAT after registration

Using the wrong VAT rate on sales

Missing VAT invoices for expenses

Reclaiming VAT on mileage payments

Treating exempt sales as zero rated

Most of these errors come from misunderstanding the basic difference between input and output VAT.

How HMRC reviews input and output VAT

During VAT inspections, HMRC typically:

Reviews output VAT calculations

Samples sales invoices

Checks VAT rates applied

Reviews input VAT claims

Requests supporting invoices

Looks for patterns or inconsistencies

Clear understanding and clean records reduce the risk of assessments and penalties.

Input VAT, output VAT, and the Flat Rate Scheme

If you use the Flat Rate Scheme, the relationship changes slightly.

Under the Flat Rate Scheme:

You still charge output VAT at normal rates

You pay HMRC a flat percentage of gross turnover

You usually cannot reclaim input VAT

Input VAT is built into the flat rate calculation

This can be confusing for new flat rate users, as input VAT still exists, but is not usually reclaimable.

Why understanding the difference really matters

Understanding the difference between input VAT and output VAT is not just academic.

It affects:

How much VAT you pay

How much VAT you reclaim

Your cash flow

Your pricing

Your risk of HMRC penalties

Many VAT problems start with this basic misunderstanding.

A simple way to remember the difference

A practical way I often explain it is this:

If VAT is going out to customers, it is output VAT

If VAT is coming in from suppliers, it is input VAT

Everything else flows from that.

Final thoughts on input VAT and output VAT

Input VAT and output VAT are the foundation of the UK VAT system. Once you understand how they differ, how they interact, and where restrictions apply, VAT becomes far easier to manage.

Most VAT errors are not caused by complex tax planning, but by confusion at this basic level. Taking the time to understand the difference, and reviewing how VAT is recorded in your business, can prevent years of quiet overpayment or unexpected HMRC challenges.

If VAT still feels confusing after grasping this distinction, that is often a sign that a short review with a VAT specialist would save time, money, and stress very quickly.