What is output and input VAT?

How to Calculate Input Value Added Tax (VAT)

For any trading business, it is important to understand how to calculate input Value Added Tax (VAT).

You can calculate input VAT by adding up the total amount of VAT incurred on purchases made by the business that relate to the provision of onward taxable supplies.

Below, we look at how to calculate input VAT while diving further into input and output VAT. We also explore whether you should register for VAT and submit returns online, and what happens if you fail to register on time.

What is input tax?

Input tax is the VAT applicable to goods and services purchased by a VAT registered business.

So long as the relevant goods and services relate to the provision of onward taxable supplies, the amount of VAT paid can be deducted from the amount owed to the HMRC (i.e., the businesses' output VAT).

An example input VAT calculation

Look at the example calculation below for a registered business that purchased items with a value of £20,000, excluding the VAT set at the standard 20% rate.

Therefore, the input VAT total for this example is £4,000.

What is output VAT?

Output VAT is the VAT element added to goods and services that are sold to customers (both businesses and consumers) from your VAT registered business. 

An example output VAT calculation formula

Here is an example calculation of output VAT for the same business above, which in the same period sold goods with a value of £50,000, excluding the 20% VAT rate. So, the output VAT equals £10,000:

On the VAT return, you deduct the input tax total from the output total to produce the amount of VAT liability owed to HMRC for that period. For example, £10,000 - £4.000 = £6,000 VAT to pay to HMRC.

When the VAT on the purchases made by the business exceeds the VAT charged on sales made by the business, it results in a negative figure. This value can be claimed from HMRC via the business's VAT return.

A common instance of when this may occur is when a taxable business makes zero-rated supplies, i.e., output VAT is zero, however as this qualifies as a taxable supply input, VAT is incurred in the course of making these supplies is recoverable.

When should I register for VAT?

There are several instances that require you to register for VAT:

  • When your business has a VAT taxable income exceeding £85,000; or
  • If you expect your business to have a VAT taxable income of over £85,000 over the next 30 days

If you realise your business will exceed a VAT taxable income of £85,000 in the next 30 days alone, you must ensure you notify HMRC of your requirement to register for VAT before the end of those 30 days.

You can also volunteer to register for VAT if you wish, regardless of the value of your taxable income. The main reason a business may elect to register for VAT is to recover input VAT incurred in the course of making these supplies.

Please contact this firm for advice on if you should register for VAT or if you need help calculating your VAT liability. You must do so if you cross the thresholds mentioned above.

Failing to register can lead to a failure to notify penalty from HMRC. The fine cost will vary depending on how long you take to register after crossing the threshold.

Additional fees include the registering late penalty and the cost of the VAT that should have been charged on the goods or services you sold through your business.

How to register for VAT

You can register for VAT online unless you’re:

  • Joining the Agricultural Flat Rate Scheme
  • Are applying for a registration exemption
  • You’re registering business units or divisions using individual VAT numbers

You should register online via the Government Gateway, for which you must have (or create) a Government Gateway Account.

Once you’ve registered, you’ll receive a VAT registration certificate with the effective date of registration. The certificate will include your VAT number and information on when to submit your return and make your first payment.

Is there a reasonable excuse for not registering for VAT?

You cannot claim ignorance as an excuse. Therefore, it is essential that you are aware of VAT registration and when to take action.

You can appeal to HMRC if you have a reasonable excuse for failing to register on time. There is no clear definition for the ‘reasonable excuse.’

However, an example would be if you or someone in your family was seriously ill at the time when you should have registered, for which you could try to appeal. You have 30 days to appeal, starting from the date on the letter sent to you informing you about the fines.

Your appeal will also require evidence.

Submitting your VAT return

Once you register for VAT you need to complete regular VAT returns and pay VAT to HMRC. These returns must be completed online, and payments made electronically to HMRC.

If you are late completing your VAT return, you may receive a penalty, dependent on whether you have defaulted in this manner before. You should always submit your return, even if you don’t think you will be able to make the payment you owe to HMRC.

That way you’ll avoid additional charges being added to your bill.

Contact HMRC immediately if you are struggling to pay the amount you owe to them. You can contact them yourself or ask your accountant or agent to speak to them on your behalf.

The VAT People can help

Employing a VAT specialist to carry out a VAT return is the best way to ensure that you receive the correct amount.

Contact a member of The VAT People team on 0161 477 6600 or contact us via our online form and a member of our helpful team will be in touch.