What Is Output VAT and How Is It Calculated?

Understand output VAT, how it differs from input VAT, how to account for both, and when and how to submit your VAT return in the UK.

Understanding output VAT is essential for any VAT-registered business in the UK. It affects how you price your products or services, how much VAT you collect on behalf of HMRC, and how you file your VAT return accurately. Alongside input VAT, it forms the core of the UK’s VAT accounting system.

What Is VAT?

VAT (Value Added Tax) is a consumption tax charged on most goods and services sold in the UK. It’s paid by the end consumer but collected by businesses at each stage of the supply chain. Businesses registered for VAT act as intermediaries, collecting VAT on sales (output VAT) and reclaiming VAT on purchases (input VAT).

The standard VAT rate in the UK is 20%, though reduced (5%) and zero (0%) rates apply to certain goods and services.

What Is Output VAT?

Output VAT is the VAT you charge your customers when you sell taxable goods or services. This is not income for your business—it belongs to HMRC and must be paid to them, typically every quarter.

For example, if you sell a product for £1,000 and charge 20% VAT, the customer pays £1,200. The extra £200 is output VAT, which you’ll declare on your VAT return and pay to HMRC.

What Is Input VAT?

Input VAT is the VAT your business pays when purchasing goods or services from other VAT-registered suppliers. As long as the purchases are for business use, you can usually reclaim this VAT from HMRC when submitting your return.

So, if you pay £600 for stock plus £120 VAT, you can claim that £120 back as input VAT—reducing your overall VAT liability.

Why Is It Important to Know the Difference Between Input and Output VAT?

Understanding the difference ensures you calculate your net VAT liability correctly. The basic VAT formula is:

Output VAT – Input VAT = VAT to pay (or reclaim)

If you collect more VAT on sales than you pay on purchases, you owe the difference to HMRC. If your input VAT exceeds output VAT, you can usually reclaim the difference.

Misunderstanding these two types of VAT can lead to underpayment, overpayment, or compliance issues, which could trigger penalties or interest charges during an HMRC audit.

What Is the Accounting Treatment for Input and Output VAT?

In your accounting system, output VAT is recorded as a liability, since it’s money you owe to HMRC. Input VAT is recorded as an asset, because it’s money you can reclaim.

When you make a sale, your invoice should clearly show the amount of output VAT charged. When you make a purchase, ensure you receive a valid VAT invoice to support your input VAT claim.

At the end of each VAT period, your VAT return will summarise:

  • Total output VAT on sales

  • Total input VAT on purchases

  • The difference, which you either pay to or reclaim from HMRC

Accurate records of all VAT-charged and VAT-paid transactions must be kept in line with Making Tax Digital (MTD) requirements, which also mean VAT returns must be filed digitally.

When Do I Have to Submit My VAT Return?

VAT returns are usually submitted quarterly, with the deadline falling one calendar month and seven days after the end of the VAT period. Payment is due at the same time.

For example, if your VAT quarter ends on 31 March, your return and payment must reach HMRC by 7 May.

Some businesses choose to submit monthly returns for better cash flow control or use Annual Accounting if they prefer one return per year with advance payments.

Example of How to Calculate Input and Output VAT

Let’s say during a quarter:

  • You sold £30,000 worth of goods, charging 20% VAT. That’s £6,000 in output VAT.

  • You bought £10,000 worth of goods and services, paying 20% VAT. That’s £2,000 in input VAT.

Now calculate your net VAT position:

£6,000 output VAT – £2,000 input VAT = £4,000 owed to HMRC

This £4,000 would be reported and paid on your VAT return for that quarter.

If the numbers were reversed—say, £1,000 output VAT and £3,000 input VAT—you would be entitled to a VAT refund of £2,000 from HMRC.

Conclusion

Output VAT is the tax your business collects on behalf of HMRC when you sell goods or services. When balanced correctly against your input VAT, it ensures accurate VAT returns and keeps you compliant with tax law. Knowing the difference between output and input VAT, applying the right accounting treatment, and submitting returns on time are all essential parts of managing VAT properly. With clear understanding and good record-keeping, VAT can be managed smoothly and efficiently.