What is Output VAT?

Output VAT is the Value Added Tax that you, as a VAT-registered business, charge on your sales of goods and services. When you sell a taxable item or service, you add VAT at the appropriate rate to your invoice. The customer pays you the VAT-inclusive amount, and you are then responsible for paying that VAT to HMRC through your VAT return. Output VAT is not your money -- you are acting as a tax collector on behalf of HMRC.

The standard VAT rate is 20%, but some goods and services attract a reduced rate of 5% (for example, domestic energy, child car seats, and some energy-saving materials) or a zero rate of 0% (for example, most food, children's clothing, books, and newspapers). Zero-rated items are technically still taxable -- you must still include them on your VAT return -- but no actual VAT is charged. Exempt supplies (such as financial services, education, and health services) are outside the VAT system entirely and are not included in your output VAT calculations.

You must issue a VAT invoice for every taxable sale to a VAT-registered customer. The invoice must include your VAT registration number, the invoice date and a unique sequential number, your business name and address, the customer's name and address, a description of the goods or services, the quantity, the unit price excluding VAT, the VAT rate for each item, and the total amount including and excluding VAT. For sales under £250, a simplified invoice is acceptable.

The timing of when output VAT becomes due depends on your accounting basis. Under the standard accruals basis, output VAT is due in the period you issue the invoice (or receive payment, whichever is earlier). Under the cash accounting scheme, output VAT is only due when the customer actually pays you, which can significantly help cash flow if your customers are slow payers.

Each time you issue a sales invoice, you calculate the VAT at the appropriate rate and add it to the net amount. Your accounting software records the output VAT separately. At the end of each VAT period, the software totals all output VAT and enters it in Box 1 of your VAT return. Your total sales excluding VAT go in Box 6.

If you sell goods or services at different VAT rates, you must show each rate separately on the invoice and account for each rate correctly. For example, if you sell a software subscription at 20% and a printed manual at 0% (as a book), each line must show the correct rate. The total output VAT is the sum of all VAT at all rates.

For certain supplies, the customer rather than the supplier accounts for the output VAT. This is called the 'reverse charge' and applies to services received from overseas, certain construction services (CIS reverse charge), and some supplies of gas and electricity. In these cases, you do not charge output VAT on your invoice, but the customer includes the equivalent amount as both output VAT and input VAT on their own return.