Glossary

Input VAT and output VAT

Definition

Output VAT is the tax a VAT-registered business charges its customers on taxable sales. Input VAT is the tax it pays to suppliers on business purchases. For each return period the business pays the tax authority the output VAT minus the recoverable input VAT, or reclaims the difference when input VAT is higher.

How it works

In the books, output VAT is credited to a VAT payable account and input VAT is debited to a VAT receivable account; neither touches revenue or expenses, because the business only collects VAT for the government. At the end of each period the two balances are netted into the amount due.

Input VAT is recoverable only on purchases used for taxable supplies and backed by valid tax invoices. VAT on exempt activities or on items the law blocks (often entertainment or passenger cars) becomes part of the cost. Rates and rules differ by country, for example 5% in the UAE and 15% in Saudi Arabia; check them with the VAT calculator and your tax authority.

Formula

VAT payable = Output VAT - Recoverable input VAT

Output VAT = Net sales × VAT rate

Example: a quarterly VAT return at 5%

A trading company in a 5% VAT country sells goods for 300,000 net and buys goods and services for 180,000 net in a quarter. Output VAT is 15,000, recoverable input VAT is 9,000, and the company pays 6,000 to the tax authority.

Example: a quarterly VAT return at 5%
Line	Net amount	VAT
Sales (output VAT)	300,000	15,000
Purchases (input VAT)	180,000	9,000
VAT payable		6,000

Related terms

VAT (value added tax)
VAT is a consumption tax charged at each stage of supply. Businesses collect output VAT on sales, recover input VAT on purchases and pay the difference to the tax authority.
Credit note
A credit note is a document a seller issues to reduce or cancel an invoice already sent, for example after returned goods, a pricing error or a discount. It reverses the revenue, the receivable and the related VAT for the credited amount.
Revenue
Revenue is the income a business earns from its ordinary activities, such as selling goods or providing services, measured at the amount it expects to be entitled to. Under the accrual basis it is recognised when control passes to the customer, not when cash arrives.
Liabilities
Liabilities are present obligations of a business to transfer cash or other resources because of past events, such as supplier invoices, loans, taxes payable and customer advances. They have a credit normal balance.
Assets
Assets are resources a business controls as a result of past events and from which it expects future economic benefits, such as cash, receivables, inventory and equipment. They have a debit normal balance and appear first on the balance sheet.

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