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Taxation (UK) · The computation of VAT liabilities

Output Tax, Input Tax and the VAT Computation

Updated 11 October 2026 · Fact-checked

Output tax is the VAT you charge customers on taxable supplies. Input tax is the VAT you pay on business purchases. For a return period, VAT payable to HMRC = output tax − input tax. If input tax is larger, HMRC repays the difference. The standard rate is 20%.

Understand Output Tax, Input Tax and the VAT Computation

VAT is a tax on the value added at each stage of the supply chain. A VAT-registered business collects VAT from its customers and passes it to HMRC. It also pays VAT to its suppliers and can usually get that back. You are effectively an unpaid tax collector.

Output tax is the VAT charged on your taxable supplies (sales). Standard-rated sales carry 20%. Zero-rated sales carry 0%, so output tax is nil, but they are still taxable supplies. Exempt sales are not taxable supplies and have no output tax.

Input tax is the VAT you are charged on purchases and expenses for your business. You normally deduct it from output tax. Some input tax is not recoverable, and you must exclude it from the computation. Typical cases are expenses that are not for business use and input tax relating to exempt supplies. The topic Input Tax Recovery and Irrecoverable VAT covers the detail.

For each return period you add up output tax and input tax. If output exceeds input, you pay the difference to HMRC. If input exceeds output, HMRC repays you the difference. The net figure is the VAT liability, or repayment.

The standard rate is 20%. A VAT-exclusive (net) price is multiplied by 20% to find the VAT. A VAT-inclusive (gross) price is multiplied by 20/120 (1/6) to find the VAT. Getting this choice right is the main skill in the computation.

Key rules to remember

VAT payable or repayable
Output tax − Input tax
A positive answer is payable to HMRC. A negative answer is repayable by HMRC.
VAT on a VAT-exclusive amount
VAT = Net amount × 20%
Gross = Net × 1.20. Standard rate is 20%.
VAT on a VAT-inclusive amount
VAT = Gross amount × 20/120 (or ÷ 6)
Net = Gross ÷ 1.20. Do not take 20% of a gross figure.
Standard rate
20%
Given in the tax rates and allowances provided in the exam.

How to solve Output Tax, Input Tax and the VAT Computation questions

Use this method for any question asking for the VAT payable or repayable for a quarter or other return period.

  1. 1List every sale and purchase in the period. Mark each as standard-rated, zero-rated, exempt or outside the scope.
  2. 2For each item, decide if the amount given is VAT-exclusive or VAT-inclusive.
  3. 3Calculate output tax on standard-rated sales only: 20% of net, or 20/120 of gross.
  4. 4Decide which purchases and expenses carry recoverable input tax. Remove items that are not for business use or that relate to exempt supplies.
  5. 5Calculate input tax on the recoverable items using the same 20% or 20/120 rule.
  6. 6Total output tax and total input tax separately.
  7. 7Deduct input tax from output tax. State clearly whether the result is payable to HMRC or repayable by HMRC.
  8. 8Check that your answer is in pounds, rounded to the nearest £, as the exam instructions require.

Quickest way: Total net amounts first, then apply 20% once

When to use it: Use this when all items are standard-rated and clearly net or gross, which is common in objective test questions.

  1. Total all standard-rated sales that are VAT-exclusive and multiply by 20%.
  2. Convert any VAT-inclusive sales by dividing by 6 to get the VAT.
  3. Total the recoverable purchases the same way.
  4. Subtract input from output and label the answer payable or repayable.

Common mistakes in Output Tax, Input Tax and the VAT Computation

  • Taking 20% of a VAT-inclusive amount.

    Students see 20% and apply it automatically.

    Fix: Check the wording. If the price includes VAT, multiply by 20/120 or divide by 6.

  • Charging output tax on exempt supplies.

    Exempt and zero-rated are confused.

    Fix: Zero-rated is taxable at 0%. Exempt is outside taxable supplies. Neither gives output tax.

  • Deducting input tax that is not recoverable.

    Students deduct VAT on every purchase they see.

    Fix: Check each expense for business use and link to taxable supplies before deducting.

  • Subtracting the wrong way round.

    Rushing under time pressure.

    Fix: Always write output tax − input tax, then label the result payable or repayable.

  • Treating the net sales figure as the VAT figure.

    The question shows a total including and excluding VAT.

    Fix: Underline what each figure represents before you calculate.

Worked examples

Example 1

A VAT-registered trader has the following for a quarter. Standard-rated sales of £90,000 (excluding VAT). Zero-rated sales of £20,000. Standard-rated purchases of £35,000 (excluding VAT), all for business use. Calculate the VAT payable to or repayable by HMRC.

Show the solution
  1. Output tax on standard-rated sales: £90,000 × 20% = £18,000.
  2. Zero-rated sales give output tax of £0.
  3. Input tax on purchases: £35,000 × 20% = £7,000.
  4. VAT payable = £18,000 − £7,000 = £11,000.

Answer: £11,000 is payable to HMRC.

Example 2

A company's quarter shows standard-rated sales of £144,000 including VAT. It also had standard-rated purchases of £54,000 including VAT, and exempt sales of £10,000. All purchases relate to taxable supplies. Calculate the VAT payable or repayable.

Show the solution
  1. Output tax: £144,000 × 20/120 = £24,000.
  2. Exempt sales of £10,000 give no output tax.
  3. Input tax: £54,000 × 20/120 = £9,000.
  4. VAT payable = £24,000 − £9,000 = £15,000.

Answer: £15,000 is payable to HMRC.

Exam tips

  • Read each figure for 'including VAT' or 'excluding VAT' before calculating. This single check protects most marks.
  • Objective test questions are marked all or nothing, so write out output and input tax separately and check the subtraction.
  • In constructed response answers, show output tax and input tax workings clearly. Label the final figure as payable or repayable.
  • Look for items that look like input tax but are not recoverable, such as non-business use.

Practice questions from The computation of VAT liabilities

Output Tax, Input Tax and the VAT Computation: frequently asked questions

What is the difference between output tax and input tax?

Output tax is VAT charged on your taxable sales. Input tax is VAT you pay on business purchases. You deduct input tax from output tax to find what you owe HMRC.

What if input tax is more than output tax?

HMRC repays the difference to you. In the exam, state that the amount is repayable by HMRC.

What VAT rate do I use in TX-UK?

The standard rate is 20%. It is given in the tax rates and allowances provided in the exam.

How do I find VAT from a price that includes VAT?

Multiply the gross price by 20/120, which is the same as dividing by 6. This gives the VAT element.