How to pay output VAT and reclaim input VAT

We’ve heard about output VAT and input VAT.

But how do you pay your output VAT to HMRC, and reclaim your input VAT?

That’s what the VAT return is for.

Basically, on the VAT return, you add up all the output VAT from that quarter, then take off all your input VAT from that figure.

The difference is what you pay to HMRC.

Input VAT for the quarter greater than output VAT?

Lucky you. HMRC will pay you the difference back.

Well, that all sounds very simple.

Sorry, that’s the easy bit.

VAT is never as simple as that.

How you fill in your VAT return and add up your output and input VAT can be done in different ways.

And also, your VAT return will look very different if you’re on the Flat Rate Scheme.

Let’s look in more detail at these.

Adding up your output and input VAT

How you add up your output and input VAT for your VAT return depends on whether you’re “invoice accounting” or “cash accounting” for VAT.


“Invoice accounting”, also called “standard accounting”, is the default method.

If you’re invoice accounting, when you’re adding up your output VAT, you include the VAT on all the invoices you’ve issued to your customers during that quarter. That’s all the invoices which are dated during that quarter.

You include the VAT on these invoices regardless of whether your customers have paid you for them yet.

What if my customer never pays me?

You have to wait 6 months and then HMRC will give you bad debt relief.

What about input VAT?

That’s done the same way.

You add up the input VAT you can claim on all the bills you’ve received with bill dates during that quarter, whether or not you’ve paid your suppliers for the bills.

What are the advantages and disadvantages of invoice accounting?

Invoice accounting can cause cashflow problems if you’ve got slow-paying customers, because you could have to pay the VAT before your customer pays you.

But it’s good for retail businesses, whose customers pay immediately, because they can reclaim the VAT sooner on their bills.

OK, that’s invoice accounting. What’s cash accounting?

“Cash accounting” , or “using the cash accounting scheme”, means you add up VAT on all the money you received from your customers against VAT invoices, and take off all the VAT you paid out to your suppliers on their bills, during that quarter.

It’s kinder for cashflow, and you don’t have to tell HMRC you want to cash account for VAT.

Why doesn’t everyone use it then?

Some businesses can’t.

If your business’s annual VAT taxable sales are more than £1.35 million, you can’t start using the cash accounting scheme.

But if you’re already using the cash accounting scheme, you can keep going until your annual VAT taxable sales are £1.6 million.

Your business also can’t use the cash accounting scheme if it’s out of date with VAT payments / returns, or, within the last year, you’ve been convicted of a VAT offence or charged a penalty for VAT evasion.

So if you want to use cash accounting, it’s even more important than usual to keep it clean!

What if I’m on the Flat Rate Scheme?

If your business is using the Flat Rate Scheme, your VAT return is filled in differently.

Instead of adding up all your output and all your input VAT, you take your total sales including VAT and work out a set percentage of that figure. The percentage depends on what line of business you’re in.

The percentages are set by HMRC to include an allowance for input VAT, so you can’t claim input VAT.

None at all?

Apart from the VAT you pay on large assets that cost over £2,000 including VAT. That you are allowed to claim.

How can FreeAgent help me?

Now for the good news.

If you’re a FreeAgent user, FreeAgent will work out your VAT return figures for you.

Whether you’re invoice accounting or cash accounting, using the Flat Rate Scheme or not, so long as you set up your FreeAgent account correctly, it’ll do all the number crunching for you.

But remember, a system is only as good as the numbers that go into it, so make sure you enter all your figures correctly, too!

Disclaimer: The content included in this blog post is based on our understanding of tax law at the time of publication. It may be subject to change and may not be applicable to your circumstances, so should not be relied upon. You are responsible for complying with tax law and should seek independent advice if you require further information about the content included in this blog post. If you don't have an accountant, take a look at our directory to find a FreeAgent Practice Partner based in your local area.

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