VAT IOSS: Input, Output VAT & Indirect Tax

What Is VAT IOSS?

VAT iOSS import is a stop shop introduced in July 2021 a simplified European Union VAT scheme. It helps in selling businesses online from the countries of the European Union directly to customers within the European Union. The iOSS scheme is mainly designed for sellers and markets selling goods from non-European Union countries to European Union consumers, with a value of no more than € 150.

According to the IOSS registration procedure, several middlemen were involved in the import VAT collecting process, which resulted in delays and additional costs. Even if they sell to several EU nations, merchants can use VAT IOSS to declare and remit EU VAT on a single monthly return. This program guarantees that the customer pays the correct VAT up front, improves transparency, and expedites delivery times. By displaying VAT-inclusive prices at checkout, businesses may help customers avoid unpleasant surprises. For deliveries to the EU to go smoothly, the IOSS number is crucial.

How Can Businesses Obtain and Verify Their IOSS Number?

Non-EU companies must complete IOSS registration, typically through an IOSS intermediary, to take part in the IOSS scheme. On behalf of the company, this middleman is in charge of submitting VAT reports and making sure that EU tax laws are followed.

A company must: 

• Select an IOSS intermediary that has been authorized by an EU member state.
• Use the middleman to register for the VAT IOSS.
• Obtain an IOSS number, which needs to be on customs paperwork.

Businesses may want to do an IOSS number check after acquiring it. This guarantees that the number is legitimate and appropriately linked to the vendor. The intermediary or EU tax portals can help with this verification.

Only one IOSS number may be used by a seller at a time. Incorrect use of this number may result in fines or the loss of IOSS eligibility, and it must not be shared throughout various platforms or entities.

What Are Input VAT and Output VAT, and How Do They Differ?

The value-added tax that a firm must pay on purchases and expenses is known as input VAT. For example, a business pays input VAT to the supplier while purchasing office supplies or raw materials.

Conversely, output VAT is the VAT that is collected from clients during sales. For instance, the output VAT is £20 if a company sells a product for £120 (including 20% VAT).

To calculate input VAT, you can use this formula:

Input VAT formula = Total Purchase Price × VAT Rate
For a £500 purchase at 20% VAT: £500 × 0.20 = £100 (input VAT)

To calculate output VAT, the formula is:

Output VAT formula = Sale Price × VAT Rate
If you sell at £200 with 20% VAT: £200 × 0.20 = £40 (output VAT)

For VAT returns, the distinction between the two is crucial. Companies pay HMRC the difference between the input and output VAT. The company might get a VAT refund if the input VAT is higher than the output VAT.

For proper reporting and compliance, it is crucial to comprehend the distinction between input and output VAT. A business is in a net VAT-recoverable situation, for instance, if it charges less VAT on sales than it does on purchases. 

How Are Input VAT and Output VAT Recorded in Journal Entries?

Input VAT and output VAT are separately recorded in journal entries to reflect their roles in accounting appropriately. Input VAT refers to the VAT paid on purchases that businesses can recoup. Input VAT is shown as a debit in journal entries since it reduces the VAT liability owed to HMRC. For example, when a company purchases goods for £1,000 plus VAT of £200, the entry debits Purchases £1,000, inputs VAT £200, and credits Bank or Accounts Payable £1,200.

Output VAT is the VAT that is collected from clients during sales. In journal entries, it shows up as a credit, signifying a debt owed to HMRC. For example, when a company sells items for £2,000 plus £400 in VAT, the entry credits sales by £2,000 and output VAT by £400, and debits bank or accounts receivable by £2,400. Businesses balance input VAT against output VAT after a VAT period. The residual amount is due to HMRC if the output VAT is greater than the input VAT; if the input VAT is greater than the output VAT, the business may be eligible for a refund.

Where Do Input VAT and Output VAT Appear on the Balance Sheet?

Depending on the circumstances, input VAT and output VAT are shown on the balance sheet under either current liabilities or current assets.

The company is entitled to a refund and will display a recoverable VAT balance under current assets if the input VAT exceeds output VAT. On the other hand, the company owes HMRC and records it under current liabilities if production VAT is higher.

Here’s how it works:

• Input VAT (recoverable): listed as “VAT receivable” under current assets.

• Output VAT (payable): listed as “VAT payable” under current liabilities.

This classification gives a quick overview of tax obligations and aids in cash flow analysis.

A simplified table: