Value added tax

Value added tax is a consumption tax that a business collects on most sales on behalf of the tax authority, tracked through separate input and output VAT accounts rather than as revenue or an expense.

ByHoang TruongUpdated July 5, 2026

See it move

Loading infographic...

A business charges 21% VAT on a €10,000 sale, giving €2,100 of output VAT owed to the tax authority. On a €4,000 purchase it pays 21% input VAT of €840, reclaimable from the same authority. VAT payable is the net of the two: €2,100 minus €840, or €1,260.

Where it fits

SubjectFinancial AccountingCoreTopicRevenue, Expenses & ProfitCoreTopicWorking Capital & Trade AccountsCore

The formula

LaTeX

\text{VAT payable} = \text{Output VAT} - \text{Input VAT}

Variables

$O u tp u t V A T$: VAT charged to customers on sales (€)
$I n p u t V A T$: VAT paid to suppliers on purchases and eligible expenses (€)

The net amount owed for the period; a negative result means the business is owed a refund instead.

Check yourself

PracticeCORE

In a quarter, a business has net sales of €15,000, charging VAT at a standard rate of 20%. In the same quarter it has net purchases of €9,000, also subject to 20% VAT. What amount is payable to the tax authority for the quarter?

Select an answer to check your understanding.