Input VAT refers to the Value Added Tax (VAT) a business pays on goods or services purchased for business use. It is the VAT charged by suppliers on items or services the business needs to produce its products or deliver its services.
Businesses that are VAT-registered can typically reclaim input VAT through their VAT returns, provided the purchases meet the eligibility criteria and are directly related to the business’s taxable activities.
Key Features of Input VAT:
- Paid to Suppliers: This is the VAT included in supplier invoices for goods or services.
- Eligible for Reclaim: Businesses can reclaim the input VAT paid on purchases used exclusively for taxable business purposes.
- Offset Against Output VAT: Input VAT is subtracted from the output VAT (the VAT charged to customers) when calculating the VAT payable to the tax authorities. If input VAT exceeds output VAT, a refund can be claimed.
Examples of Input VAT:
- VAT on office supplies like stationery or furniture.
- VAT on raw materials used in production.
- VAT on professional services such as legal or accounting fees.
- VAT on utilities like electricity, water, or internet for business premises.
How Input VAT Works:
- The business purchases goods or services and pays VAT to the supplier.
- The input VAT is recorded in the business’s accounting system.
- When completing a VAT return, the input VAT is subtracted from the output VAT. The result determines whether the business owes tax or is due a refund.
- If input VAT exceeds output VAT for the period, the business can claim a refund from the tax authorities.
Key Considerations:
- Eligible Purchases: Only VAT incurred on purchases used for business purposes can be reclaimed. VAT on personal or exempt supplies is not reclaimable.
- Documentation Required: A valid VAT invoice from the supplier is essential to reclaim input VAT.
- Special Rules:
- Businesses under certain VAT schemes (e.g., the Flat Rate Scheme) may not be able to reclaim all or any input VAT.
- Businesses that provide both taxable and exempt goods/services may need to apply a partial exemption method to determine how much input VAT can be reclaimed.
Additional Notes:
- The rules for reclaiming VAT can vary depending on the country’s tax laws. For example, EU and UK VAT systems are generally aligned but may have local differences.
- VAT recovery is subject to strict compliance, and incorrect claims can lead to penalties.