Output VAT is the VAT you charge customers on your sales. Input VAT is the VAT your suppliers charge you on your purchases. Your VAT return nets the two: you pay HMRC the output VAT collected less the input VAT you can reclaim. The right to set one against the other comes from sections 24 and 25 of the Value Added Tax Act 1994.
Output VAT or input VAT: which is which?
| Output VAT | Input VAT | |
|---|---|---|
| What it is | VAT you add to sales | VAT you pay on purchases |
| Direction | You collect it for HMRC | You reclaim it from HMRC |
| VAT return | Box 1 | Box 4 |
| Net result | Box 5 = Box 1 − Box 4 | Refunded if input exceeds output |
What input VAT can you reclaim?
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.
What if input VAT is higher than output VAT?
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 the credit carries through the return rather than being lost.
Primary sources
- Value Added Tax Act 1994, Section 24 (input tax and output tax) — legislation.gov.uk — Statutory definitions of input tax and output tax
- Value Added Tax Act 1994, Section 25 (payment by reference to accounting periods) — legislation.gov.uk — Right to credit input tax against output tax
- How to fill in and submit your VAT Return — gov.uk — Where input and output VAT appear on the return (Boxes 1, 4, 5)
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