What Is the Difference Between Input VAT and Output VAT?

Input VAT is the tax you pay on purchases, and output VAT is the tax you charge on sales. Learn how each works and how they affect your VAT return and cash flow.

Introduction

For any VAT-registered business, understanding the difference between input VAT and output VAT is essential for managing tax correctly. These two terms describe the VAT you pay and charge in the course of running your business, and the difference between them determines whether you owe money to HMRC or are due a refund.

This article explains what input VAT and output VAT mean, how they work in practice, and how they affect your VAT returns and cash flow.

What Is VAT?

Value Added Tax (VAT) is a consumption tax charged on most goods and services sold in the UK. Businesses that are registered for VAT must charge it on their sales and can reclaim it on their purchases.

The standard VAT rate in the UK is 20%, though some goods and services are charged at reduced or zero rates. VAT is collected and paid to HMRC through regular VAT returns, usually filed every quarter.

What Is Input VAT?

Input VAT is the VAT you pay on goods and services that you purchase for your business. This could include raw materials, office supplies, professional services, utilities, or equipment.

If you are VAT registered, you can normally reclaim input VAT from HMRC, as long as the purchases are made for business purposes and you have a valid VAT invoice.

Examples of input VAT:

  • VAT paid on a supplier’s invoice for stock.

  • VAT included in professional fees, such as accountancy or legal services.

  • VAT on office rent, utility bills, or maintenance costs.

If a purchase is used partly for business and partly for personal use, you can only reclaim the business portion of the VAT.

What Is Output VAT?

Output VAT is the VAT you charge your customers when selling goods or services. It is collected on behalf of HMRC and must be paid to them as part of your VAT return.

Examples of output VAT:

  • VAT added to a sales invoice when you sell a product or service.

  • VAT charged on delivery fees or installation services.

  • VAT included in the price of goods sold online or in-store.

If your business sells goods or services that are exempt from VAT or zero-rated, you do not charge output VAT on those sales.

The Relationship Between Input VAT and Output VAT

Your VAT return calculates the difference between your input VAT (the VAT you pay on purchases) and your output VAT (the VAT you collect on sales).

  • If output VAT is greater than input VAT, you owe the difference to HMRC.

  • If input VAT is greater than output VAT, you can reclaim the difference as a refund from HMRC.

Example:
A company sells goods worth £60,000 plus £12,000 VAT (output VAT). It has also bought materials worth £30,000 plus £6,000 VAT (input VAT).

VAT owed to HMRC = £12,000 (output VAT) £6,000 (input VAT) = £6,000 payable.

In this example, the business pays £6,000 to HMRC because it collected more VAT from customers than it paid on purchases.

If the input VAT had been higher, the business would have received a refund instead.

When You Can Reclaim Input VAT

You can reclaim input VAT on business expenses if:

  • The purchase was made for business purposes.

  • You have a valid VAT invoice.

  • The supplier is VAT registered.

You cannot reclaim VAT on:

  • Goods or services used solely for personal use.

  • Business entertainment for clients or potential customers.

  • Certain exempt supplies, such as financial or insurance services.

If your business makes both taxable and exempt supplies, you may be partially exempt, meaning you can only reclaim a proportion of the input VAT.

VAT Return and Reporting

When submitting your VAT return, you must include both input and output VAT figures. The process typically looks like this:

  1. Record all sales: Add up the total VAT you have charged on invoices (output VAT).

  2. Record all purchases: Add up the total VAT you have paid on business expenses (input VAT).

  3. Calculate the difference: Subtract input VAT from output VAT to find your VAT liability or reclaim amount.

  4. Submit your VAT return: File through HMRC’s Making Tax Digital (MTD) system, usually every three months.

Example Scenario

Lucy runs a design business that charges VAT on all services. In one quarter, she:

  • Invoices clients £20,000 plus £4,000 VAT.

  • Purchases equipment and services totalling £8,000 plus £1,600 VAT.

Her VAT calculation is:
Output VAT = £4,000
Input VAT = £1,600
VAT payable to HMRC = £4,000 £1,600 = £2,400

If her purchases had included £5,000 VAT instead, she would reclaim £1,000 from HMRC instead of making a payment.

Input VAT on Imports and Exports

  • Imports: When importing goods from outside the UK, you may have to account for VAT using the postponed VAT accounting scheme. You record both input and output VAT on the same return, so there is no immediate cash flow impact.

  • Exports: Exports outside the UK are usually zero-rated, meaning no VAT is charged, but you must keep evidence that the goods left the country.

Common Mistakes to Avoid

  • Missing VAT invoices: You cannot reclaim input VAT without valid documentation.

  • Including personal expenses: VAT can only be reclaimed on business-related costs.

  • Incorrect tax points: VAT must be recorded based on the invoice or payment date, whichever comes first.

  • Not separating exempt and taxable supplies: If your business makes both, you must use a partial exemption calculation.

The Role of an Accountant

An accountant can help you:

  • Identify which expenses qualify for input VAT reclaims.

  • Ensure you charge and report output VAT correctly.

  • Handle VAT returns and Making Tax Digital compliance.

  • Avoid overclaiming or underpaying VAT.

With professional support, you can ensure your VAT returns are accurate, avoid penalties, and improve cash flow management.

Conclusion

Input VAT is the tax you pay on business purchases, while output VAT is the tax you collect from customers on sales. The difference between the two determines whether you pay VAT to HMRC or reclaim it.

Understanding how input and output VAT work helps you manage your finances more effectively and stay compliant with HMRC regulations. Keeping accurate records, submitting VAT returns on time, and seeking advice when needed will ensure your VAT accounting runs smoothly.