What is input VAT and output VAT?
This article explains what the differences between input VAT and output VAT are. Read all about it here!
What is input VAT and output VAT?
You don’t know what input VAT and output VAT are? Let's find out!
When it comes to standard VAT reporting, businesses must take into account two types of VAT: input VAT and output VAT. Confused about the difference? Let’s take a closer look at the definitions of the two terms, as well as how both are normally accounted for when the business has a VAT number in the country where the VAT was incurred or not.
It is important to note that input and output VAT cancel each other out in your VAT return. So, your VAT paid to the tax authorities in each country will be the difference between these two.
What is input VAT?
When talking about what input VAT is, it is defined as the VAT applied to company purchases of goods or services by your business. Essentially, this is VAT that was already paid by your business on those transactions and can be later deducted on your VAT return. Deductions are normally possible on a VAT return provided that the business is VAT registered in the country where the transaction is taxable.
In case the company is not VAT registered in the place where the transaction is taxable, certain aspects should be considered to find out if this input VAT is refundable. Non-EU established businesses may be able to recover VAT in EU countries through the 13th Directive, as long as the countries in question have a reciprocity agreement in place.
EU-established companies that make purchases in other EU countries in which they do not possess a VAT number may be able to claim their VAT refund through the EU refund mechanism for VAT refunds.
Applications for VAT refunds can be confusing. Marosa would be happy to help you claim back your VAT.
What is output VAT?
Output VAT is the VAT that your company charges to its customers on sales of goods or provision of services. This VAT should be charged regardless of if the customer is a private individual or another company, however, it is important to keep in mind that some supplies should not charge VAT. This is the case when you are making exempt or reverse charge supplies as per local rules on certain goods and services. In case of reverse charge, the transaction would have no VAT applied and the customer would be responsible for calculating the VAT due on their VAT return. This would be simultaneously reported as input and output VAT for the customer, making the total impact on their cash flow nil.
Check out our dedicated articles on reverse charge and EU B2B services for more detailed information about reverse charge and its exceptions.
For standard distance sellers carrying out B2C transactions, VAT must always be charged and in this sense, output VAT will always be incurred. It is important to understand the applicable VAT rate on these transactions, as any mistakes could lead to penalties and audits from the relevant tax authorities.
So, what is the correct VAT rate to be used in e-commerce sales?
In general, if a company is carrying out distance sales in another country, you should charge VAT at the rate applicable in your client’s country. You do not have to register in your client’s country even if you charge VAT applicable in that country. We published several articles on e-commerce rules in Europe that explain the regulations for online sales.
The European Union made an online database available to check the applicable VAT rate on each product in all European countries.
What is input VAT and output VAT? : Different scenarios
Let’s now look at various situations for a VAT registered business in order to fully understand what is the input VAT and the output VAT. In the following scenarios, we assume that the business is VAT registered in the country where they have incurred input and output VAT and they will be reporting this activity on a VAT return.
1. Input VAT is less than your Output VAT
In this situation, the VAT due on the net amount of sales of goods or services is greater than the VAT to be deducted on company purchases. This is a typical situation for businesses, and it simply means that the company will have to pay and report the total amount of VAT due (Output VAT – Input VAT) to the relevant tax authorities via their periodic VAT returns.
2. Input VAT is greater than your Output VAT
Sometimes you make more purchases than sales. In these cases, companies may have more VAT to be deducted from purchases made than the VAT due on sales of goods or services (in other words, their input VAT is greater than their output VAT).
This means that the business would find itself in a VAT credit position and would be entitled to a refund on the amount of the credit. There is no one singular standard practice throughout the European Union as to how the amount is recoverable, as each country can decide its own regulations.
In some countries, the amount to be credited can be carried forward to the following VAT return and deducted from the VAT due until the credit amount runs out. In other countries, the VAT cannot be carried forward and there are other procedures in place.
3. Input VAT is equal to your Output VAT
On extremely rare occasions, the input VAT could be the same as the output VAT, making the final VAT position 0. Other times, there is simply no business activity carried out and there is neither input nor output VAT to be accounted for.
Companies should be careful, as having a 0 amount of VAT due does not mean that no VAT return needs to be submitted. Either they will report both the input and output VAT amounts as normal and the final position would be 0, meaning no payment is due. On the other hand, they would submit a nil VAT return in the case that no taxable transactions have taken place during that period.
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Still have any questions about what is input and output VAT? We would be happy to help clarify, as well as discuss how our solutions can make your VAT accounting easier.