Input VAT - What is input VAT? Read more here
Learn all about input VAT and how proper handling can optimise your business finances. Gain insights into how you can deduct input VAT from your purchases and reduce your costs effectively
How your business can effectively manage incoming VAT and optimise VAT accounting
What is input VAT?
Input VAT is the VAT a business pays to its suppliers when purchasing goods and services necessary for its operations. This VAT can be deducted from the output VAT that the business charges its customers. For example, if a business buys raw materials, office supplies, or professional services, it will pay VAT on these purchases, and this constitutes the input VAT.
Input VAT
Input VAT, also known as purchase VAT or input tax, is the VAT a business pays when purchasing goods or services. It is a crucial part of VAT accounting and can be deducted from the VAT a business charges its customers, also known as output VAT. This ensures that only the final consumer bears the VAT cost.
Use of input VAT in accounting
In accounting, it is important to track both input and output VAT to calculate the company's VAT settlement correctly. VAT accounting helps ensure that the business neither overpays nor underpays VAT to the tax authorities.
When a business purchases goods or services, the VAT paid is recorded as an asset in the accounts. This means the business has the right to either get this VAT refunded or offset it against the VAT it must remit to the tax authorities. In this way, input VAT reduces the company's overall VAT liability.
Example of input VAT calculation
Let’s consider an example where a business purchases office supplies for DKK 10,000 excluding VAT. The VAT rate in Denmark is 25%, so the input VAT will be:
Purchase price excl. VAT: DKK 10,000VAT (25%): DKK 10,000 * 0.25 = DKK 2,500Total price incl. VAT: DKK 10,000 + DKK 2,500 = DKK 12,500In the accounts, this transaction would be recorded as follows:
Debit: Office supplies (expense) DKK 10,000Debit: Input VAT (asset) DKK 2,500Credit: Supplier debt (liability) DKK 12,500How to use input VAT in practice
To ensure correct VAT settlement, businesses must continuously record all purchases and the associated input VAT. At the end of each VAT period, the company calculates the total input and output VAT for the period. The difference between output VAT and input VAT is the amount the company needs to pay to or receive from the tax authorities.
If the output VAT exceeds the input VAT, the business must pay the difference to the tax authorities. If the input VAT exceeds the output VAT, the company can get a refund of the difference. This process is known as VAT settlement.
Example of VAT settlement
Let’s assume that in a given VAT period, a company has the following transactions:
| Transaction Type | Amount excl. VAT | VAT (25%) | Amount incl. VAT |
|---|---|---|---|
| Sales | DKK 50,000 | DKK 12,500 | DKK 62,500 |
| Purchases | DKK 20,000 | DKK 5,000 | DKK 25,000 |
In this example, the company has sold goods worth DKK 50,000 excluding VAT and purchased goods worth DKK 20,000 excluding VAT. The output VAT is DKK 12,500 (25% of DKK 50,000), and the input VAT is DKK 5,000 (25% of DKK 20,000).
The VAT settlement for the period will be:
Output VAT: DKK 12,500Input VAT: DKK 5,000VAT due to tax authorities: DKK 12,500 - DKK 5,000 = DKK 7,500The company will need to pay DKK 7,500 to the tax authorities for this VAT period.
Conclusion
Input VAT is a crucial component of VAT accounting for any business. By correctly managing and recording input VAT, businesses can ensure they pay the correct amount of VAT to the tax authorities and avoid unnecessary expenses. For e-commerce businesses and other companies, understanding input VAT is essential to maintaining sound financial health and complying with tax obligations.
Learn all about input VAT and how proper handling can optimise your business finances. Gain insights into how you can deduct input VAT from your purchases and reduce your costs effectively