If you're VAT registered, VAT flows through your business in two directions. You charge VAT to your customers, and you pay VAT to your suppliers. The VAT you charge is called output VAT. The VAT you pay is called input VAT. Your VAT return is simply the difference between the two.
In short: output VAT is VAT on your sales. Input VAT is VAT on your purchases. You pay HMRC the output VAT minus the input VAT. If input VAT is bigger, HMRC pays you the difference.
What is output VAT?
Output VAT is the VAT you add to the price of the goods and services you sell. If you sell a £1,000 website design at 20%, you charge your customer £1,200. The £200 is output VAT. It isn't your money — you collect it on HMRC's behalf and pay it over on your VAT return.
Output VAT goes in Box 1 of your VAT return.
What is input VAT?
Input VAT is the VAT you pay on things you buy for your business: stock, equipment, software, professional services, fuel and so on. If you buy a £600 laptop plus £120 VAT for the business, the £120 is input VAT.
You can usually reclaim input VAT on your VAT return, as long as the purchase is for the business and you have a valid VAT invoice. It goes in Box 4.
How output VAT and input VAT work together
VAT to pay = Output VAT − Input VAT
This is why VAT is described as a tax on the value added at each stage. Each business only pays VAT on the difference between what it sells for and what it buys in. The final consumer, who can't reclaim anything, bears the full cost.
Example: you pay HMRC
| In the quarter | Net | VAT at 20% |
|---|---|---|
| Sales to customers (output VAT) | £30,000 | £6,000 |
| Business purchases (input VAT) | £8,000 | £1,600 |
| VAT to pay HMRC | £4,400 |
Example: HMRC pays you
A new shop buys £20,000 of stock and fittings (£4,000 input VAT) and makes £5,000 of sales in its first quarter (£1,000 output VAT). Input VAT is higher, so HMRC owes the shop £3,000. This is a VAT repayment.
Repayments are also common for businesses that mostly sell zero-rated goods, such as food or children's clothes. They charge 0% output VAT but still pay 20% input VAT on many costs, so they are often in repayment.
The VAT chain: a simple example
| Stage | Sells for (net) | Output VAT | Input VAT reclaimed | Pays HMRC |
|---|---|---|---|---|
| Timber supplier | £100 | £20 | £0 | £20 |
| Furniture maker | £300 | £60 | £20 | £40 |
| Furniture shop | £500 | £100 | £60 | £40 |
| Total VAT paid to HMRC | £100 |
The customer pays £600 for the table, including £100 VAT. HMRC receives exactly that £100, collected in three parts along the chain.
When you can't reclaim input VAT
- No valid VAT invoice. You generally need a VAT invoice from the supplier. See VAT invoice vs normal invoice.
- Private use. Only the business part of a cost can be reclaimed. If a phone is used half for personal calls, you can usually only reclaim half the VAT.
- Business entertainment. VAT on entertaining clients generally can't be reclaimed.
- Cars. You usually can't reclaim VAT on buying a car that's available for private use. VAT on business fuel and repairs can often be reclaimed.
- Exempt sales. If some of your sales are exempt from VAT, you may only be able to reclaim part of your input VAT (known as partial exemption).
- Zero-rated and exempt purchases. There's nothing to reclaim if no VAT was charged, such as on train tickets or insurance.
Flat Rate Scheme: different rules
Under the VAT Flat Rate Scheme, you pay HMRC a fixed percentage of your VAT-inclusive turnover instead of working out output VAT minus input VAT. In return, you usually can't reclaim input VAT on your purchases, except on certain capital assets costing more than £2,000 including VAT.
Input VAT from before you registered
When you first register, you may be able to reclaim VAT on some purchases made before registration: goods you still have that were bought in the previous 4 years, and services bought in the previous 6 months, as long as they're for the business you're registering.
Frequently asked questions
Is output VAT an expense?
No. Output VAT is money you collect for HMRC. It isn't part of your income, so it shouldn't count towards your sales or profit.
Can I reclaim input VAT if I'm not VAT registered?
No. Only VAT-registered businesses can reclaim input VAT. If you're not registered, VAT is simply part of your costs.
How far back can I claim input VAT I forgot?
You can usually claim missed input VAT on a later return, up to 4 years after the return it should have been on.
Where do output and input VAT go on a VAT return?
Output VAT goes in Box 1 and input VAT in Box 4. Box 5 shows the difference. See how to prepare for a VAT return for all nine boxes.
Work out the figures
Use the VAT Invoice Calculator to total the VAT on sales invoices, and the Reverse VAT Calculator to split the input VAT out of receipts that only show a total.
Official source: GOV.UK: Reclaiming VAT and GOV.UK: VAT for businesses.