Input vs. Output VAT: Key Differences Businesses Must Know

Understanding the difference between input VAT and output VAT is essential for businesses operating in the UAE. Since VAT was introduced in 2018, companies must correctly calculate, report, and manage VAT liabilities to remain compliant with the Federal Tax Authority (FTA). However, many businesses struggle with distinguishing between these two VAT types, leading to errors in VAT filings, incorrect tax returns, and unnecessary financial penalties. In this blog, we will break down input VAT and output VAT, explain how they work, and discuss their impact on businesses. We will also highlight best practices for managing VAT and ensuring compliance with UAE tax laws.

What is Output VAT?

Output VAT refers to the VAT that a business collects from customers when selling goods or services. This VAT is included in the sales price and must be reported and paid to the FTA through VAT returns. Businesses act as tax collectors on behalf of the government by charging VAT on taxable supplies.

Key Characteristics of Output VAT

• Charged on taxable sales: Businesses must apply the standard 5% VAT rate on all taxable supplies.

• Collected from customers: Output VAT is included in invoices issued to customers.

• Payable to the FTA: The VAT collected must be reported in periodic tax returns and remitted to the government.

• Mandatory for VAT-registered businesses: All companies with taxable supplies exceeding AED 375,000 annually must register for VAT and charge output VAT.

Example of Output VAT Calculation

Suppose a company sells office furniture for AED 10,000. The 5% VAT charged on this sale is: AED 10,000 × 5% = AED 500 (Output VAT). The customer pays a total of AED 10,500, including VAT. The company then remits the AED 500 VAT to the FTA during the tax filing period.

What is Input VAT?

Input VAT is the tax a business pays when purchasing goods or services required for its operations. If the purchases are related to taxable business activities, the company can recover this VAT by deducting it from output VAT.

Key Characteristics of Input VAT

• Paid on business-related purchases: VAT is charged when businesses acquire goods or services used for commercial purposes.

• Claimable through VAT returns: Companies can recover input VAT by deducting it from their total VAT liability.

• Reduces the amount of VAT payable: If input VAT exceeds output VAT, businesses can claim a VAT refund.

• Applicable to eligible expenses only: Input VAT can only be recovered on purchases related to taxable business activities.

Example of Input VAT Calculation

If a company buys office supplies for AED 5,000, the 5% VAT paid is: AED 5,000 × 5% = AED 250 (Input VAT). The company can claim this AED 250 VAT as a deduction when filing VAT returns, reducing its total VAT liability.

How to Calculate VAT Liability

A business’s VAT liability is determined by calculating the difference between output VAT and input VAT using the following formula:

VAT Payable = Output VAT – Input VAT

If the output VAT exceeds the input VAT, the company owes the difference to the FTA. If the input VAT is higher, the company is eligible for a VAT refund.

Example of VAT Liability Calculation

• Output VAT collected on sales: AED 5,000

• Input VAT paid on purchases: AED 3,000

• VAT payable to the FTA: AED 5,000 – AED 3,000 = AED 2,000

In this case, the business must pay AED 2,000 in VAT to the FTA. If the input VAT was higher than output VAT, the company could claim a VAT refund from the tax authority.

Key Differences Between Input VAT and Output VAT

Source and Application

Output VAT is generated from the sale of taxable goods and services, while input VAT is incurred on purchases made by the business. Output VAT is collected from customers, whereas input VAT is paid to suppliers.

VAT Collection and Reporting

A business collects output VAT and remits it to the FTA. In contrast, input VAT is claimed as a deduction on VAT returns, reducing the total tax liability.

Impact on VAT Returns

During VAT filing, output VAT is reported as tax payable, while input VAT is deducted to determine the net VAT liability. If the input VAT exceeds the output VAT, the business can apply for a VAT refund.

Common Mistakes Businesses Make with VAT Management

1. Failing to Claim Input VAT on Eligible Purchases

Some businesses miss out on reclaiming VAT on allowable expenses, resulting in a higher tax liability. It is essential to keep records of all VAT invoices to claim input VAT correctly.

2. Incorrectly Charging Output VAT

Businesses sometimes charge VAT on exempt or zero-rated goods, leading to tax miscalculations. Understanding which products and services are subject to VAT helps prevent overcharging or undercharging customers.

3. Not Keeping Proper VAT Records

Failure to maintain accurate VAT records, including sales invoices and purchase receipts, can lead to compliance issues and penalties during FTA audits.

4. Claiming Input VAT on Non-Business Expenses

VAT can only be recovered on expenses related to taxable business activities. Claiming VAT on personal or non-business expenses can result in non-compliance fines.

How Young and Right Can Help

At Young and Right, we specialize in VAT advisory services to help businesses manage their VAT obligations effectively. Our experienced team provides comprehensive VAT solutions, ensuring compliance with UAE tax regulations and optimizing VAT recovery.

1. VAT Compliance and Advisory Services

• Ensuring that businesses correctly apply input and output VAT, reducing errors in tax filings.

• Providing expert VAT advisory services to keep businesses updated on tax law changes.

2. VAT Return Filing and Documentation

• Assisting in accurate VAT return filing to avoid penalties and incorrect submissions.

• Helping businesses maintain proper VAT records and invoices for compliance and audits.

3. VAT Refund Assistance

• Supporting businesses in claiming VAT refunds when input VAT exceeds output VAT.

• Ensuring that refund applications meet FTA requirements for smooth approval.

4. VAT Audit Support

• Preparing businesses for FTA VAT audits, ensuring accurate VAT reporting.

• Providing support for VAT disputes, compliance checks, and tax reconciliations.

5. Long-Term VAT Planning and Optimization

• Implementing VAT strategies that optimize cash flow and reduce tax liabilities.

• Assisting with VAT Compliance in Free Zones, Mainland UAE, and international tax treaties.

Conclusion

Understanding and managing input VAT and output VAT is essential for businesses in the UAE to stay compliant and optimize their tax liabilities. By ensuring correct VAT calculations, maintaining proper documentation, and seeking expert guidance, companies can avoid costly mistakes and improve financial efficiency. Partnering with Young and Right ensures that your business stays compliant with UAE VAT regulations, files accurate VAT returns, and maximizes tax savings. Contact us today for expert VAT support tailored to your business needs.