Every VAT-registered business carries a running balance with HMRC, and the nominal ledger is where that balance lives. Most UK software sets it up as either one VAT control account or a small group of accounts: one for VAT charged on sales, one for VAT reclaimable on purchases and one for the amount owed once a return is filed. This page uses the three-account layout because it makes each step visible; if your software uses a single account, the same entries apply and simply net off inside it.
The UK has no fixed numbering for these accounts, so ignore any code you have seen elsewhere and follow the scheme your software uses (see how nominal codes are numbered).
The output VAT account: tax on what you sell
The output VAT account (often called sales tax or VAT on sales) is credited every time you issue a VAT invoice or record a taxable sale. A £1,000 net sale at the standard rate of 20% posts:
| Account | Debit | Credit |
|---|---|---|
| Trade debtors | £1,200 | |
| Sales | £1,000 | |
| Output VAT | £200 |
Credit notes reverse the entry, so the account falls when you give a customer money back. Two other things belong here that people often miss: the output side of any reverse charge and the output side of postponed import VAT (both covered below). If a customer you claimed bad debt relief on later pays, the VAT you repay goes here too.
What does not belong here: VAT on purchases, payments to HMRC and sales that are zero-rated or exempt (those still need the right VAT code so their value reaches the return, but they post nothing to this account).
The input VAT account: tax you can reclaim
The input VAT account (purchase tax, VAT on purchases) is debited with the VAT on supplier invoices you are entitled to reclaim. You need a valid VAT invoice, and the expense must be for the business. A £300 net purchase of stationery:
| Account | Debit | Credit |
|---|---|---|
| Office costs | £300 | |
| Input VAT | £60 | |
| Trade creditors | £360 |
VAT you cannot reclaim, such as VAT on business entertaining or most cars, stays in the cost account. Posting it to input VAT overstates your claim. Bad debt relief claims also go through this account, because HMRC treats them as input tax.
From return to payment: clearing the balances
When you submit a return, the output and input accounts for that period are emptied into a VAT liability account (sometimes called VAT due to HMRC). Say the quarter shows output VAT of £18,400 and input VAT of £6,250:
| Account | Debit | Credit |
|---|---|---|
| Output VAT | £18,400 | |
| Input VAT | £6,250 | |
| VAT liability | £12,150 |
Most software makes this journal itself when the return is filed. When you pay HMRC, the bank payment clears the liability:
| Account | Debit | Credit |
|---|---|---|
| VAT liability | £12,150 | |
| Bank | £12,150 |
In a repayment quarter the signs swap: the liability account goes into debit and HMRC’s payment into your bank clears it. Between filing and payment, the liability account shows exactly what you owe for the last period, while output and input VAT build up for the current one. That separation is what makes the VAT control account reconciliation quick: each account should tie to something specific.
Reverse charge and postponed import VAT: both sides at once
Some transactions make you account for VAT as if you were the supplier. You post the same amount to both accounts, so the net cost is nil if you can fully recover VAT.
Services bought from abroad. A £1,000 subscription from a US software company with no UK VAT on the invoice:
| Account | Debit | Credit |
|---|---|---|
| Software costs | £1,000 | |
| Bank | £1,000 | |
| Input VAT | £200 | |
| Output VAT | £200 |
The VAT goes in boxes 1 and 4, and the £1,000 goes in both box 6 and box 7. The rules on which services qualify are in reverse charge VAT for services.
Imported goods under postponed VAT accounting. You take the import VAT figure from your monthly postponed import VAT statement, not from the shipping invoice, and post it to both accounts. The VAT goes in boxes 1 and 4, but the value of the goods goes only in box 7. The statement routine is explained in postponed VAT accounting in bookkeeping.
If you are partly exempt, the input side may not be fully recoverable, so the two sides will not cancel out.
How the accounts line up with the MTD return boxes
| Return box | What it shows | Where the figure comes from |
|---|---|---|
| Box 1 | VAT due on sales and other outputs | Output VAT for the period |
| Box 2 | VAT on goods acquired from the EU into Northern Ireland | Output side of NI acquisitions only |
| Box 4 | VAT reclaimed on purchases and other inputs | Input VAT for the period, including bad debt relief |
| Box 5 | Net VAT to pay or reclaim | Should equal the credit (or debit) to VAT liability |
| Box 6 | Total sales excluding VAT | Net value of transactions coded to sales VAT codes, plus reverse charge values |
| Box 7 | Total purchases excluding VAT | Net value of purchases with VAT codes, plus reverse charge and postponed import values |
Boxes 6 and 7 are driven by VAT codes, not by the VAT accounts, which is why a manual journal straight into output or input VAT without a code creates a difference between the ledger and the return. VAT codes in bookkeeping explains how to choose them. HMRC sets out what each box must contain in VAT Notice 700/12.
On the balance sheet
VAT owed to HMRC is shown under creditors: amounts falling due within one year, inside “other creditors including taxation and social security”. A repayment due from HMRC is shown under debtors. Output and input VAT for the open period are combined with the liability account for this purpose; the split is for your bookkeeping, not for the statutory accounts.
Habits that keep these accounts clean
- Never post a payment to HMRC to output VAT or input VAT. It belongs on the liability account.
- Lock each period after filing, so a late invoice dated in a filed quarter cannot quietly change a submitted figure.
- On the cash accounting scheme, expect the accounts to fill when invoices are paid, not when they are raised.
- Leave HMRC penalties and interest out of the VAT accounts entirely.