Tax and VAT
Input VAT
Input VAT is the value-added tax that a registered business pays on goods and services purchased for its own operations, which can typically be recovered from the tax authority.
What is Input VAT?
When you buy supplies, equipment, or services to run your business, the supplier often charges you a value-added tax. This tax is known as Input VAT because it applies to the inputs of your business. If your business is registered for tax, you do not usually have to bear this cost permanently. Instead, you keep a record of the tax paid on these purchases and deduct it from the tax you collect from your own customers. The tax authority in your country sets specific rules about which expenses qualify for recovery. For example, tax paid on raw materials is almost always recoverable, while tax on certain entertainment expenses might not be. Keeping accurate purchase records is essential to ensure you can claim back the correct amount.
Output VAT - Input VAT
A positive result is the amount you owe the tax authority. A negative result means you are due a refund or credit.
How Input VAT works
The process begins when you purchase goods or services from a registered supplier. The supplier issues a valid tax invoice that clearly shows the tax amount charged. You must record this invoice in your accounting system, categorising the tax portion as an asset rather than an expense. At the end of your tax period, you calculate the total tax you collected from sales and subtract the total tax you paid on purchases. You then report these figures on your tax return. If you collected more than you paid, you send the difference to the tax authority. If you paid more than you collected, the authority will either refund the difference or credit it toward your next period.
- You purchase goods or services from a registered supplier for business use.
- The supplier provides a tax invoice detailing the exact tax amount charged.
- You record the purchase and the associated tax in your accounting records.
- You deduct this paid tax from the tax you collect on your sales.
- You submit a return and pay the net balance to the tax authority.
Worked example
Gulf Traders buys office furniture for 10,000 plus a 1,000 tax charge, making the total invoice 11,000. The 1,000 is their Input VAT. Later that month, Gulf Traders sells goods for 20,000 and charges 2,000 in tax to their customers. This 2,000 is their Output VAT. At the end of the period, Gulf Traders calculates their net tax liability by subtracting the 1,000 paid from the 2,000 collected. They only pay the remaining 1,000 to the tax authority. This mechanism ensures the business only pays tax on the value it added.
Why it matters for your business
Tracking this tax properly is vital for protecting your profit margins. If you fail to record the tax you pay on purchases, you will not be able to deduct it from your final tax bill. This means you end up paying the tax out of your own pocket, which unnecessarily increases your business costs. Keeping strict records of supplier invoices is the only way to prove your claims to the tax authority. Using software like Paper & Pen, which creates invoices and posts journal entries for free, helps you automatically track these amounts so you never miss a deduction.
Questions
Common questions
What is the difference between Input VAT and Output VAT?
Can I claim Input VAT on all my business expenses?
Related terms
- Value added tax Value added tax is an indirect consumption tax assessed on the incremental value created at each stage of the supply chain, from initial production to the final sale.
- Output VAT Output VAT is the value-added tax that a registered business calculates and charges to its customers on the sale of taxable goods and services.
- VAT return A VAT return is an official tax document submitted to a government authority that summarises a business's total sales, purchases, and the resulting value-added tax payable or refundable for a specific period.
- Tax invoice A tax invoice is a legal document issued by a registered business to a buyer, detailing the goods or services provided and the specific amount of tax collected on that sale.
- Taxable supply A taxable supply is any provision of goods or services made in the course of business that is subject to value-added tax under local tax laws.
- Corporate income tax Corporate income tax is a direct levy imposed by a government on the net profits or taxable income earned by a registered company during a specific financial period.