Input VAT vs Output VAT: What's the Difference?

Only VAT on genuine business costs, and only when you hold a valid VAT invoice showing the supplier's VAT number. You cannot reclaim input VAT on business entertainment, on most company cars, or on costs that relate to VAT-exempt supplies. Reclaiming VAT you are not entitled to is one of the most common HMRC assessment triggers, so the invoice evidence matters.

HMRC pays you the difference as a refund. This is normal for businesses making zero-rated sales, such as most food and children's clothing, or in a quarter with heavy capital spending. Under section 25 of the VAT Act 1994^[2] the credit carries through the return rather than being lost.

You must register once your taxable turnover passes £90,000 in any rolling 12-month period, or if you expect to pass it within the next 30 days alone. The figure is set by Schedule 1 of the VAT Act 1994^[4] and rose from £85,000 on 1 April 2024. Treat £90,000 as the 2026/27 figure; HMRC can revise it at any Budget. Registration matters because the two triggers work differently, and missing either one carries a penalty.

One looks backward, one looks forward. You register on whichever you hit first:

• Rolling 12-month test: at the end of every month, total your taxable sales for the previous 12 months. This is not the tax year or calendar year. Taxable turnover is standard-rated, reduced-rated, and zero-rated sales; it excludes VAT-exempt supplies and sales of capital assets. Cross £90,000 and you have 30 days to register, with VAT due from the first day of the second month after you went over.
• Future 30-day test: if you expect taxable turnover to exceed £90,000 in the next 30 days on its own, usually from one large contract, you must register immediately. Registration takes effect from the date you became aware, not the end of the 30 days.
• Miss either trigger and you face a failure-to-notify penalty^[5] plus the VAT you should have charged but did not.

When your taxable turnover for the next 12 months is expected to fall below the £88,000 deregistration threshold in Schedule 1 of the VAT Act 1994^[4], you may apply to cancel. The £90,000 threshold rose from £85,000 under the VAT (Increase of Registration Limits) Order 2024^[6]. Businesses below £90,000 can also register voluntarily to reclaim input VAT on purchases; whether that helps depends on whether your customers are themselves VAT-registered.

Once registered, you must keep your VAT records digitally and file returns through software that connects to HMRC. The digital record-keeping duty sits in regulations 32A to 32C of the VAT Regulations 1995^[7], made under the Finance (No. 2) Act 2017^[8]. It has applied to every VAT-registered business, regardless of turnover, since 1 April 2022; it applied first from April 2019 to businesses above the threshold. A narrow exemption exists for businesses HMRC accepts are digitally excluded, for example on grounds of age, disability, or remoteness.

MTD for VAT comes down to two duties:

1. Keep digital records of your sales and purchases, including the VAT on each.
2. Submit each VAT return through MTD-compatible software using its connection to HMRC, not by manually typing figures into the old online form.

A digital link is an electronic transfer of data between two pieces of software with no manual re-keying. Copying a figure by hand from a spreadsheet into your VAT software breaks the chain. Spreadsheets are still allowed if bridging software passes the totals to HMRC automatically. Notice 700/22^[9] sets out which transfers qualify, and HMRC runs a points-based penalty system for late returns and for failing to keep digital records: each late submission adds a point, and reaching the threshold triggers a fixed penalty.