What Is Input Tax (Input VAT)? A Tax Guidance

Input tax is the VAT charged on the goods and services you pay for your business activities. Learn all about it in this quick guide.

If your business is VAT registered, this article is for you! It’s incredibly important you understand what input tax is. You could be missing out on a VAT refund if you don’t reclaim it from the HMRC.

Here’s What We’ll Cover:

What Is Input Tax?

What Is Output Tax?

How to Calculate Input Tax and Output Tax

How to Reclaim Input Tax

Key Takeaways

What Is Input Tax?

Input VAT or Input tax is the amount of tax added to goods or services you purchase. These are on your business expenses. These could be:

• Goods you purchase in the UK
• Goods you purchase outside the UK
• Goods you bring into Northern Ireland from a taxable person in an EU member state
• Services you purchase but receive outside the UK
• Development, research and overhead costs

What Is Output Tax?

Output tax is the value-added tax you charge on your own goods or services. If you have a VAT-registered business, you must add VAT to every taxable item on the invoice.

These sales could be to other businesses or regular consumers.

How to Calculate Input Tax and Output Tax

Let’s say you purchase £50,000 worth of goods with VAT at the standard rate. That is 20%.

£50,000 * 0.20 = £10,000

Therefore input VAT is £10,000.

During the same VAT period, you sell £45,000 worth of goods at the standard rate.

£45,000 * 0.20 = £9000

Therefore output VAT is £9000

When you subtract the input from the output, you get -£1000. If the goods you purchased qualify, you can reclaim the £1000 on your VAT refund form.

How to Reclaim Input Tax

You can reclaim input tax on purchases that relate to:

• Supplies that are liable at the standard rate, zero rate or reduced rate. The standard rate is 20%. The reduced rate is 5% and the zero rate is…well…0%. (These values are true as of October 2021, so do check again when you are reading).
• Supplies that are out of scope for UK tax, but would be tax liable if they were made in the UK
• Supplies for services you make outside of the UK. Or related to a service or good you export outside the UK.

You can’t reclaim input tax if:

• The purchase doesn’t relate to business purposes at all
• The purchase relates to your company car. Motor vehicle expenses are accounted for in other ways.
• The purchase relates to business entertainment expenses
• You’re a developer and you sell or lease certain items in buildings at a zero rate
• The purchase falls under the tour operators margin scheme
• The goods are sold to you under a VAT second-hand scheme
• The purchase is an asset from a business that is transferring to you
• The charge was made in error

How to Claim Input Tax

You reclaim input tax by deducting it on your VAT refund form. If you have a negative balance when you subtract input VAT from output VAT, the HMRC will refund the difference.

You should try to do this during the same accounting period that your supplier sent you the goods. You can find the time of supply or “tax point” date on the invoice.

To make an accurate claim, you need to fill in the VAT form. You also need to have copies of your sales receipts and tax invoices to successfully process a VAT return.

You can find VAT refund forms on the HMRC website.

Key Takeaways

If you have a VAT registered business, you can reclaim input VAT on your business expenses. To keep track of your expenses, try our easy expense reporting software. You can save receipts and invoices directly to your expenses in the cloud. That way, when you want to submit your VAT refund form to the tax authorities, all of your expenses are organised.

For more UK tax accounting guides like this one, head to our resource hub!

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