Glossary

VAT (value added tax)

Definition

VAT, or value added tax, is a consumption tax charged on goods and services at every stage of the supply chain. A registered business charges output VAT on its sales, deducts the input VAT it paid on business purchases, and pays the difference to the tax authority, so the final consumer bears the tax.

How it works

VAT is neutral for registered businesses: it passes through their books as a liability and a receivable, not as revenue or cost. Output VAT collected from customers is owed to the tax authority. Input VAT on purchases is recoverable. If input exceeds output in a period, the business has a refund or a credit to carry forward.

Rates differ by country and change over time. Examples checked in November 2026: the UAE standard rate is 5% (since 1 January 2018), Saudi Arabia 15% (since 1 July 2020) and Bahrain 10% (since 1 January 2022). In the EU, the VAT Directive sets a minimum standard rate of 15% and member states choose their own, such as 19% in Germany and 20% in France. Always confirm the current rate with the tax authority before filing.

Common mistakes are recording gross amounts as revenue, claiming input VAT on blocked items such as most entertainment, and losing track of VAT on credit notes. Separate input and output VAT accounts, as in the GCC chart of accounts template, keep the return easy to prepare. Use the VAT calculator to add or remove VAT from a price.

Formula

VAT = Net amount × Rate

Gross = Net × (1 + Rate)

VAT inside a gross price = Gross × Rate ÷ (1 + Rate)

VAT payable = Output VAT - Input VAT

Example: a quarter's VAT at 15%

A company sells goods for 200,000 net plus 30,000 VAT and buys materials for 120,000 net plus 18,000 VAT during the quarter. It owes 30,000 - 18,000 = 12,000 to the tax authority.

Example: a quarter's VAT at 15%
Entry	Debit	Credit
Sale: Receivables / Revenue, Output VAT	230,000	200,000 + 30,000
Purchase: Inventory, Input VAT / Payables	120,000 + 18,000	138,000
Return: Output VAT / Input VAT, VAT payable	30,000	18,000 + 12,000

Related terms

Accounts receivable
Accounts receivable are amounts customers owe the business for goods or services already delivered. They are current assets and are tracked per customer.
Accounts payable
Accounts payable are amounts the business owes suppliers for goods or services received. They are current liabilities and are tracked per supplier.
Zakat
Zakat is an Islamic levy on wealth that companies in Saudi Arabia and some other GCC countries account for and pay annually, usually based on a zakat base derived from the balance sheet.
Chart of accounts
A chart of accounts is the coded list of all accounts a business uses, organized as a hierarchy of assets, liabilities, equity, revenue and expenses. Ledgeriano ships six templates, from about 97 to about 248 accounts.

Guides

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VAT calculator

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FAQ

Questions about VAT (value added tax)

How do I calculate VAT backwards from a total?

Divide the gross amount by 1 plus the rate to get the net amount; the rest is VAT. At 5%, a gross price of 105 contains 100 net and 5 VAT. At 15%, 115 contains 15 VAT.

Is VAT a cost for my business?

Not if you are registered and the purchase is for taxable business use: input VAT is recovered. It becomes a cost when you are not registered, make exempt supplies, or the input VAT is blocked by law.

What is the difference between VAT and sales tax?

Sales tax is charged once, at the final sale to the consumer. VAT is charged at each stage with credit for tax paid earlier, which makes evasion harder and spreads collection across the chain.

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