What is Input VAT & Output VAT?

VAT registered companies must meet a number of obligations, including calculating, reporting and paying VAT liability on a regular basis and retaining specific records.

If the taxable turnover of your business for the last 12 months by the end of any month was over £85,000, (known as the registration threshold for Value Added Tax), you must be registered and account for VAT to HM Revenue and Customs (HMRC).

This guide for VAT-registered businesses focuses on the input VAT and output VAT rules.

 

What is input VAT & output VAT?

 

Input VAT is the VAT included in the price for VAT taxable goods or services you buy to use in your business. Output VAT is the VAT you must charge when you sell goods or services, provided your business is registered to do so. Output VAT must be calculated and collected on both sales to other businesses and sales to ordinary consumers.

As a VAT-registered business in the UK, unless all of your goods or services are exempt from VAT or fall outside the scope of the UK VAT system, you must charge VAT on everything that you sell in the course of your business.

Once you have registered for VAT, you can start charging VAT on all of your customer invoices. You can also start reclaiming any VAT that you have paid yourself on any goods or services purchased for use in your business.

This means you will be able to deduct any input VAT against your output VAT in your quarterly return. A VAT return is the form that you must fill in to tell HMRC how much VAT you have charged, as well as how much VAT you have paid to other businesses. You will usually need to send a VAT return to HMRC, usually every 3 months. This is known as your accounting period. Importantly, if you are registered for VAT, you must submit a VAT return even if you have no VAT to pay or to reclaim for any given period.

 

Input VAT & output VAT rules

 

Below we set out the basic rules and requirements when it comes to reclaiming input VAT and charging output VAT:

 

Input VAT

 

If you are registered for VAT, you can reclaim the VAT paid on all goods and services you buy for use in your business. When you make a VAT taxable purchase, you must:

• retain a copy of the purchase invoice which shows the VAT information, including the
• VAT-exclusive price and VAT applied to that price
• record the transaction in your VAT account
• record the amount on your VAT return.

If any items are partly for personal use, you can still reclaim VAT, but only the business-related proportion. For example, if half your mobile phone calls are business and half are for personal use, you can reclaim 50% of the VAT paid on the purchase price and service plan.

You can also reclaim VAT paid on goods or services bought before you registered for VAT, provided you bought them within 4 years for any goods that you still have or 6 months for services. However, you can only reclaim VAT on purchases for the business that is now registered for VAT and the purchases must relate to your business purpose.

 

Output VAT

 

If you are VAT-registered, you must charge VAT when you make taxable supplies. A taxable supply is a term for supplying goods and services on which VAT can be charged. What qualifies for VAT, and the VAT rate you must charge, will depend on the type of goods or services that you provide in the course of your business. When you sell goods or services through your business, to correctly charge your customers for VAT, you must:

• work out the VAT-inclusive price using the applicable VAT rate
• show the VAT information on your sales invoice, displaying the VAT separately
• record the transaction in your VAT account
• record the amount on your VAT return.

 

Input VAT & output VAT rates

 

There are three possible rates of VAT: standard, reduced or zero-rated.

Most goods and services that you buy or sell will be chargeable to VAT at the standard rate of 20%, where you must pay or charge this rate unless the goods or services are classed as reduced or zero-rated.

When the reduced rate of 5% can be charged will depend on the item, as well as the circumstances of the sale, for example, child car seats and domestic fuel or power are charged at 5%, while mobility aids for older people are charged at 5% if they are for someone over age 60 and the goods are installed in their home. A full list of VAT rates on goods and services, including reduced-rate goods and services, can be found online at GOV.UK.

In respect of zero-rated goods and services, this rate means that the goods are still subject to VAT, but the chargeable rate is 0%. For example, you must charge the zero-rate on goods that you export from either England, Wales or Scotland (Great Britain) to somewhere outside the UK. However, zero-rated goods are still classed as taxable supplies, even if the tax rate is 0% at present, because this can be increased by the government in any Budget changes.

 

How does input VAT & output VAT work?

 

How do you calculate VAT-exclusive and VAT-inclusive prices when reclaiming input VAT and charging output VAT?

 

VAT-exclusive prices for input VAT purposes

 

When buying goods or services for use in your business, you may need to work out the price excluding VAT, so that you can calculate the amount of VAT you paid if you plan to reclaim this. This should be set out on your purchase invoice, although the formula may still come in handy.

To work out a price that excludes the standard 20% rate of VAT, you must divide the price including VAT by 1.2. For example, if you buy a chair for a total price of £120, you will need to take 120 ÷ 1.2 = 100, so the VAT-exclusive price is £100, where the amount you can claim back will be the difference between the two numbers of £20. Similarly, to work out a price that excludes the reduced 5% rate of VAT, you must divide the price including VAT by 1.05.

 

VAT-inclusive prices for output VAT purposes

 

When charging VAT on goods or services, you will need to work out the price including VAT. To work out a price that includes the standard 20% rate of VAT, you must multiply the price excluding VAT by 1.2. For example, if you sell a table for £500, you must take 500 x 1.2 = 600, so the VAT-inclusive price is £600 (the VAT itself being £100). Similarly, to work out a price that includes the reduced 5% rate of VAT, you must multiply the price excluding VAT by 1.05.

 

How to record and reclaim VAT

 

In most cases, VAT-registered businesses must also be registered to submit their VAT returns directly to HMRC under the Making Tax Digital for Value Added Tax (VAT) scheme. This scheme became mandatory for all VAT-registered businesses from 1 April 2022, unless exempt. You will need compatible software to be able to submit your returns.

If you have not yet registered for Making Tax Digital you can do so using your government gateway ID, password and VAT registration number. This is the 9-digit number that HMRC should have sent you when you first registered and which you must include on all your VAT invoices. You should also have been given confirmation of your registration date, known as your ‘effective date of registration’, and information about when to submit your first VAT return and payment. The effective date of registration is the point at which you can start charging output VAT on your sales and reclaiming input VAT on items bought from this date.

The deadline for submitting your VAT return is usually one calendar month plus 7 days after the end of your accounting period. This is also the deadline date for paying HMRC, so you will need to allow time for the outstanding VAT payment to reach HMRC’s account. You can check your online account to find out when your VAT Returns are due and when the payment must clear HMRC’s account. You can also set up an email reminder each time your VAT return is due.

When completing a VAT return, you will need to include:

• your total sales and purchases for the accounting period
• the amount of VAT you owe for that period (the output VAT)
• the amount of VAT you can reclaim for that period (the input VAT).

For example, during an accounting period, if you purchase goods worth £74,400, including VAT with a 20% VAT rate, the input VAT will be £12,400. If, during that same period, your business sells good worth £150,000, excluding VAT with a 20% VAT rate, the output VAT will be £30,000. On your VAT return, the £12,400 input VAT should be deducted from £30,000 output VAT, which in this case amounts to a total of £17,600 VAT payable to HMRC.

If your VAT on purchases for the business exceeds the VAT on sales in any given accounting period, the difference will be negative and refunded to you by HMRC.

 

Input VAT and output VAT repayment rules

 

There are special rules on claiming refunds of any output tax already accounted for on a VAT return if a customer has failed to settle an invoice, either in full or at all. Equally, there are
clawback rules where you, as a business, fail to settle a supplier’s invoice for which you have already claimed the input VAT. These are known as the bad debt relief and clawback rules.

 

Bad debt relief

 

If a customer does not pay you for goods or services, and you decide to write off the invoice as a bad debt, you might be able to claim relief from output VAT by way of a refund in your return. You must, however, submit your claim within 4 years and 6 months of the date of supply or the date payment was due, whichever was later. You can also only claim a refund of any VAT paid if the debt is older than 6 months, the debt has not been sold on and you did not charge more than the normal price for the item in question.

Importantly you cannot reclaim VAT using an invalid invoice. To be valid, invoices must include your VAT number and display the VAT separately. The VAT invoices that you generate form a very important part of your business records that you are required to keep by law, where you must keep a copy of every VAT invoice issued. Similarly, the VAT invoices you receive are the primary evidence for you to recover any VAT that you have incurred as input tax. VAT invoices are also crucial to your business customers. This is because the VAT invoice is the primary evidence that will allow them, in turn, to recover the VAT that you have charged.

 

Clawback rules

 

The clawback rules make provision for repayment of input VAT when supplies are not paid for by yourself. Usually, you will be required to repay input VAT if you do not pay for supplies within 6 months of the relevant date. The relevant date is the date of the supply, or if later, the due date for payment. Your suppliers will not be required to notify you, so you will need to monitor the time you take to pay your suppliers to ensure you do not fall foul of the VAT rules.

The same methods used in calculating how much you can claim for input VAT are used in calculating how much of a repayment you will be required to make, based on the unpaid amount at the relevant date. For example, if a supply was received for £1,200 (including £200 VAT), and by the time of the relevant date you have paid £500, the unpaid amount will be £700. The VAT repayment will therefore be £200.00 × £700.00 ÷ £1,200.00 = £116.66.