When you register for VAT in the UK, there are numerous important concepts and terms you will need to understand to ensure you file your VAT returns correctly. One of these terms is input VAT. In this blog, we’ll explain Input VAT, how it works, and how you can best manage reclaiming this tax for your business.
Diving Deeper into Input VAT
If you have registered for VAT, your business is earning over the taxable turnover threshold of £85,000 and can charge VAT on your goods and services. You will also need to file a VAT return online and log all the purchases you’ve made on behalf of the business that have had VAT added to them as well as all the VAT charges you’ve put onto your goods and services.
Definition of Input VAT
Input VAT is the amount of VAT you pay on goods and services that are liable for VAT. It’s that simple. Input VAT is important when you file your VAT returns, and affects how you are reimbursed for VAT you’ve paid on purchases for your business.
HMRC defines input tax as allowing “someone who is registered for VAT to reduce the amount of Output tax they pay to HMRC by the amount of VAT they have been charged by their suppliers in making their taxable supplies.”
Input VAT is a very beneficial part of registering for VAT because you can claim back the money spent on VAT taxable goods or services you’ve purchased for your business. You can deduct any input VAT you have paid against any of the VAT you’ve charged in your VAT return.
How Does Input VAT Work?
Unless the goods and services you purchase on behalf of the business are zero-rated, you will pay VAT on them. This VAT is counted against the VAT you charge. The difference between the two is either reimbursed to you – you’ve paid more in VAT purchases than on VAT sales – or you pay in the difference to HMRC – you’ve charged more VAT than you’ve spent.
Difference between Input VAT and Output VAT
Input VAT is the opposite of Output VAT; both are important terms you must understand. Input VAT is, as described above, the VAT you pay for goods and services on behalf of your business. Output VAT is the VAT you pay for your own goods and services to your customers. This is the VAT reflected on your invoices.
Use Case Scenarios of Applying Input VAT
Here are two common scenarios that help explain how input VAT applies in different situations:
Input VAT on Purchase of Goods
If you are running a stationery business, you would need to purchase paper supplies to ensure you had enough stock to supply your customers. This paper would be sold to your business with VAT added and would be considered a business expense. The VAT you pay on this paper is your input VAT that you then enter into your VAT return for reclaim.
Input VAT on Purchase of Services
If you are running a confectionary business, you would need to purchase specialised supplies to ensure you can properly decorate and design your confections. These supplies would be sold to your business with VAT included, and are then another form of Input VAT and business expense.
The Process of Input VAT Recovery
There are several important tips you should apply when recording, managing and submitting your input VAT:
- Keep absolutely pristine records of your business expenditure. Invoices, statements, costs – every last item of paperwork – should be recorded so you can claim your Input VAT back correctly and remain compliant with HMRC.
- Ensure any purchases you’ve made have had VAT added. Some items are zero-rated or VAT exempt, which means you won’t have been charged VAT, so you cannot claim anything back from HMRC.
- Claiming Input VAT requires that you to show HMRC proof of your expenses. This takes the conversation back to record-keeping – have an accounting system that makes tracking and managing your costs and VAT easy. It will make your life immeasurably more manageable if you can quickly and efficiently identify your expenses, VAT calculations and more.
- When it comes time to submit your VAT return, you will need to provide information about both your Input VAT and your Output VAT so the system can accurately calculate how much VAT you have to pay to HMRC.
Submitting your Input VAT is simple:
- Log into your online VAT portal
- Follow the step-by-step instructions on the portal
- Accurately enter the amount of Input VAT you want to claim along with proof.
- The HMRC system will calculate how much VAT you owe or how much is owed to you.
Remember: If you’ve spent more VAT than you’ve invoiced for, then HMRC will reimburse you.
Legal Aspects and Regulation of Input VAT
There are several criteria outlined by HMRC that are essential for your business to meet if you are to claim anything as Input VAT. These include:
- The amount you claim must have been correctly charged by another company
- The amount you claim must be connected to a taxable import or acquisition
- The supplies on which VAT is charged must be made to the person or company claiming the Input VAT
- Items for which you are claiming Input VAT must have been purchased for the business
- You can claim Input VAT on items received during your specific accounting period, although there are exceptions to this rule
- You must have evidence for your claims
- The supplies can’t be subject to Input Tax restrictions
Conclusion: Navigating Input VAT in Business Operations
While Input VAT in itself is not extremely complicated, managing all the different aspects of VAT and the various rules and regulations can be. It’s advisable to seek professional guidance and support to ensure your business remains VAT compliant and that you always have spotless records and data for HMRC.
Blue dot provides exceptional support with next-generation technology designed to help your business recoup the maximum amount of VAT and improve compliance in parallel. As a world leading AI tax compliance platform, our VATBox solution automatically and accurately analyses all your invoices and receipts for VAT reclaim. It then runs all your transactions through updated tax rules and regulations per country, ensuring accurate and compliant VAT returns and allowing you to simplify the VAT management process from start to finish.