At the end of every quarter, or in some cases annually, a VAT registered contractor or freelancer must add up all the VAT they’ve charged and then deduct the VAT they’ve been charged themselves during their business transactions.
Accountants often refer to these key elements of the VAT return as Output Tax and Input Tax.
What exactly is Output Tax?
So, you’re a small business owner who is VAT registered. Therefore, you have to add VAT onto your invoices or the goods you sell. The standard rate is 17.5% of the product or service your selling. This additional amount your adding is known as the Output Tax.
And Input Tax?
When you purchase products or services for your business, you will often be charged VAT. This VAT you’re paying is known as the Input Tax. But it must be for your business needs!
Doing your VAT return
Quite simply, your VAT return involves adding up your Output Tax and taking away the Input Tax. If you’ve paid out more VAT than you’ve taken in then you can claim a VAT repayment on your return.
Conversely, if you’ve received more VAT than you’ve paid out, then you will have to pay the difference.
In the modern age, VAT returns can only be done online. The best online accounting services make this process incredibly easy leaving the days of VAT returns being a painful struggle confined to the past.