What is Input VAT?

Input VAT is the Value Added Tax you pay when purchasing goods and services for your business. As a VAT-registered business, you can reclaim most input VAT from HMRC through your VAT return. The mechanism is straightforward: you deduct your input VAT (Box 4 on the VAT return) from your output VAT (Box 1), and only pay the difference to HMRC. If your input VAT exceeds your output VAT (for example, if you made a large purchase or your sales are zero-rated), HMRC will refund the difference.

To reclaim input VAT, you must hold a valid VAT invoice from the supplier. For purchases under £250, a simplified invoice (showing the supplier's VAT number, date, description, and VAT-inclusive total) is sufficient. For larger purchases, you need a full VAT invoice showing the supplier's name and address, VAT number, invoice date and number, your name and address, a description of goods or services, the quantity, the unit price excluding VAT, the VAT rate, the VAT amount, and the total including VAT.

Not all input VAT is reclaimable. HMRC specifically blocks recovery on certain items: business entertainment (unless for overseas customers), the purchase of a car (unless used solely for business, which is rare for directors), and non-business use. If you use something partly for business and partly for personal purposes, you can only reclaim the business proportion. For example, if your mobile phone is used 70% for business, you can reclaim 70% of the VAT on the bill.

If your business makes both taxable and exempt supplies, you are 'partly exempt' and must use a partial exemption method to calculate how much input VAT you can recover. The standard method apportions input VAT based on the ratio of taxable to total supplies, but special methods can be agreed with HMRC if the standard method produces an unfair result.

When you receive a purchase invoice that includes VAT, you record it in your accounting software with the correct VAT amount. At the end of each VAT period, your software totals all the input VAT from your purchase invoices and enters the figure in Box 4 of your VAT return. This is then deducted from your output VAT (Box 1) to arrive at the net amount due or reclaimable.

The timing of when you can reclaim input VAT depends on your accounting basis. Under the standard (accruals) basis, you reclaim VAT in the period you receive the VAT invoice, regardless of when you pay. Under the cash accounting scheme, you reclaim VAT in the period you actually pay the supplier. The cash accounting scheme can help cash flow if you have long payment terms with suppliers.

For capital items over £50,000 (or £250,000 for land and buildings), the Capital Goods Scheme requires you to adjust your initial input VAT recovery over five years (ten years for land) if your use of the asset changes. For example, if you reclaim 100% of VAT on a building but later use part of it for exempt purposes, you must repay some of the VAT.