What Is Input VAT and How Does It Work?

Understanding VAT is vital for any VAT-registered business in the UK. One of the most important parts of managing VAT is knowing the difference between input VAT and output VAT. Getting this wrong can result in incorrect tax returns, financial penalties, or missed reclaim opportunities.

What Is VAT?

VAT stands for Value Added Tax, which is a consumption tax charged on most goods and services sold in the UK. It’s collected at each stage of the supply chain—from manufacturer to wholesaler to retailer to consumer—but ultimately paid by the end customer. Businesses act as intermediaries, collecting VAT on behalf of HMRC.

What Is Input VAT?

Input VAT is the VAT a business pays on goods or services it buys from other VAT-registered businesses. If your business is VAT registered, you can usually reclaim this VAT on your VAT return, as long as the purchases relate to your business activities.

For example, if you buy computer equipment for your office and the invoice includes £200 VAT, that £200 is input VAT. You can typically claim this amount back when filing your VAT return.

What Is Output VAT?

Output VAT is the VAT you charge your customers when you sell goods or services. This VAT doesn’t belong to your business—it’s collected on behalf of HMRC and must be paid over to them.

If you sell a product for £1,000 plus £200 VAT, that £200 is output VAT. You owe that amount to HMRC, even though the customer paid it to you.

What Is the Difference Between Input VAT and Output VAT?

The difference lies in the direction of the transaction. Input VAT is VAT you pay, and output VAT is VAT you collect.

In practice, when you complete your VAT return, you calculate the difference between your output VAT and input VAT. If your output VAT is higher, you pay the difference to HMRC. If your input VAT is higher, you may be able to claim a refund.

This offset mechanism ensures you’re only paying VAT on the value added by your business.

How to Account for Input VAT and Output VAT

To account for VAT properly, you must keep detailed records of all VAT paid and received. For input VAT, that means retaining valid VAT invoices from suppliers. For output VAT, you need to issue VAT invoices to customers and record the amounts charged.

Your VAT return will summarise both:

• Input VAT claimed on purchases

• Output VAT charged on sales

The return will show whether you owe VAT to HMRC or are due a refund.

Example of How to Calculate Input and Output VAT

Imagine your business sells goods worth £20,000 plus VAT in a quarter. That means you’ve charged output VAT of £4,000 (20% of £20,000). During the same period, you’ve bought stock and services totalling £10,000 plus £2,000 VAT. That £2,000 is your input VAT.

Now subtract input VAT from output VAT:

£4,000 (output VAT) – £2,000 (input VAT) = £2,000 VAT owed to HMRC

You would pay £2,000 to HMRC when submitting your return.

When Must I Submit My VAT Return?

VAT returns are usually submitted quarterly, though some businesses may submit them annually or monthly depending on their VAT scheme. Your VAT return and payment are generally due one calendar month and seven days after the end of the VAT period.

For example, if your VAT quarter ends on 31 March, your return and payment would be due by 7 May.

All VAT-registered businesses must also comply with Making Tax Digital (MTD) rules, which require digital records and filing through approved software.

Why Is It Important to Know the Difference?

Understanding the distinction between input VAT and output VAT is essential for compliance and cash flow. If you fail to account for VAT correctly, you may overpay HMRC or, worse, underpay and face interest or penalties. It also helps in making accurate pricing decisions, maintaining clear financial records, and preparing for VAT inspections.

Incorrectly claiming input VAT—for example, on non-business or personal expenses—can result in disallowed claims and fines. Similarly, underreporting output VAT can trigger audits and repayment demands.

Conclusion

Managing VAT effectively starts with a clear understanding of input and output VAT. Input VAT is the tax you pay on purchases, while output VAT is what you collect from customers. Knowing how to track, calculate, and report these figures ensures your business remains compliant and avoids unexpected liabilities. Keep accurate records, stick to submission deadlines, and seek professional advice if your transactions are complex or international.