What is Input VAT?

What is Input VAT?

• A. VAT paid by a business on purchases or expenses. This can be claimed back by HMRC.
• B. VAT charged on sales to customers.
• C. VAT on employee salaries.
• D. VAT paid on penalties.

Answer: (A)

Input VAT is the VAT a business pays on purchases and expenses it incurs for running the business. This amount is recoverable from HMRC when you submit your VAT return, provided the purchases relate to making taxable supplies. In practice, you record the VAT you’ve paid on buyings as input VAT and offset it against the VAT charged to customers (output VAT). If input VAT is larger than output VAT, you reclaim the difference from HMRC; if output VAT is larger, you pay the difference. For example, buying stock for 100 with 20% VAT gives input VAT of 20. Selling goods for 200 with 20% VAT gives output VAT of 40. The net payable to HMRC would be 40 minus 20, i.e., 20. This concept distinguishes purchases and expenses from output VAT on sales, which is why VAT on employee salaries or penalties isn’t described as input VAT.

Input VAT is the VAT a business pays on purchases and expenses it incurs for running the business. This amount is recoverable from HMRC when you submit your VAT return, provided the purchases relate to making taxable supplies. In practice, you record the VAT you’ve paid on buyings as input VAT and offset it against the VAT charged to customers (output VAT). If input VAT is larger than output VAT, you reclaim the difference from HMRC; if output VAT is larger, you pay the difference.

For example, buying stock for 100 with 20% VAT gives input VAT of 20. Selling goods for 200 with 20% VAT gives output VAT of 40. The net payable to HMRC would be 40 minus 20, i.e., 20.

This concept distinguishes purchases and expenses from output VAT on sales, which is why VAT on employee salaries or penalties isn’t described as input VAT.