Input VAT (Input Tax)

How input VAT offsets output VAT

HMRC’s VAT guide (Notice 700) defines both halves. Output tax “is the VAT that’s due on your taxable supplies.” Input tax “is the VAT you’re charged on your business purchases and expenses.” The return nets them: if output tax is larger, you pay the difference, and “if your input tax is greater than your output tax, you reclaim the difference from HMRC.”

A quarter for a UK-registered software company shows the arithmetic. It charges 20,000 GBP of VAT on its sales. It pays 3,000 GBP of VAT on hosting, software and an accountant’s fees. The return shows output tax of 20,000 GBP, input tax of 3,000 GBP, and a payment of 17,000 GBP.

The right to deduct has conditions everywhere, and they are similar. Iceland’s tax authority, Skatturinn, says input tax applies to purchases “for use in business activities which are liable to VAT,” that “VAT that cannot be verified by a sales invoice is not deductible as input tax,” and that it is a precondition “that the vendor has charged VAT” on the purchase. Most systems also block certain costs outright: Skatturinn’s list includes food, entertainment, gifts and passenger cars.

Exempt sales, zero-rated sales and input recovery

Two kinds of sale charge the customer no VAT, and they treat input VAT in opposite ways. Stripe’s guide to zero tax amounts sets out the difference. Exempt products “aren’t subject to VAT, and sellers typically can’t reclaim input VAT on costs related to producing or supplying them.” Zero-rated products “are technically taxable, but a 0% VAT rate is applied. The customer pays no tax, but sellers can usually reclaim input VAT on related expenses.” Skatturinn says the same of exempt services: their suppliers “cannot charge VAT or get credit for input VAT.”

The distinction shows up in Stripe as the taxability reason on each tax line: `product_exempt` for an exempt sale and `zero_rated` for a zero-rated one. Both show a tax amount of zero, so a Stripe report on its own won’t tell you which costs carry recoverable input VAT. A business with a mix of taxable and exempt sales usually has to split its input VAT between them, under rules that vary by country.

A reverse-charge sale is different again. The seller charges no VAT because the business customer accounts for it, and the customer can then deduct it as its own input VAT on the same return. Skatturinn notes this for foreign electronic services bought by Icelandic businesses: the buyer “can account for the VAT on the electronically supplied services as part of the input tax.”

Why pay-only schemes have no input VAT

Simplified schemes for foreign sellers trade away the deduction to make registration light. Skatturinn says it directly of Iceland’s scheme for foreign electronic services: “VOES registration is a pay-only supplier registration, which means sellers cannot deduct input tax.” The VOES return covers two months and is filed in Icelandic krónur.

The EU One Stop Shop works the same way. The European Commission’s OSS portal says “VAT on business expenses incurred in the Member State of consumption cannot be offset” in the OSS return. It names three other routes: the electronic VAT refund mechanism under Directive 2008/9/EC, the procedure under the 13th VAT Directive (86/560/EEC) for businesses established outside the EU, or the domestic VAT return of a member state where the business is registered but not established.

The practical effect is that every unit of VAT on a pay-only return is a payment. A US company registered for VOES that buys local services in Iceland, such as a conference booth or an Icelandic contractor’s invoice, can’t net the VAT it paid against what it owes. It either claims that VAT back separately or treats it as a cost.

Refund routes for foreign businesses

Most VAT systems give foreign businesses a separate way to recover local VAT, outside any return. They tend to share features: a minimum claim period, a minimum amount, a deadline, the same blocked costs as for local businesses, and conditions about local sales.

Iceland’s is typical. Under Regulation 1243/2019, a foreign business that is neither resident nor has a permanent establishment in Iceland can claim on form RSK 10.29, by email to Skatturinn. The claim covers at least two months in fixed bimonthly blocks, up to one calendar year, is filed at least 15 days after the period ends and within six years after the end of the calendar year, and must meet a minimum amount (101,000 ISK for 2025, or 20,200 ISK for a full calendar year). VAT on meals, entertainment and gifts is excluded.

One condition matters most to a digital seller: the applicant must not have sold goods or services in Iceland during the period the claim covers. Skatturinn’s VOES page says sellers “may apply for reimbursement of VAT,” but a VOES-registered seller with Icelandic customers in every period may not meet the refund page’s no-sales condition. Read both pages, and ask Skatturinn before counting on a refund. Other countries’ refund schemes have their own versions of this condition, so check each one before you treat foreign VAT on costs as recoverable.

Input VAT in your QuickBooks books

On an ordinary registration, input VAT is an asset you net against your output VAT liability, and QuickBooks tracks both through the tax codes on purchases and sales. For a foreign seller on a pay-only scheme, the bookkeeping is simpler and less favorable. There is no input VAT asset to record against that registration, because the return has nowhere to use it. VAT paid on local costs belongs in the expense itself, unless and until you file a refund claim you expect to succeed, and then the amount claimed can sit in a receivable until the refund arrives.

The VAT on Stripe’s own fees is a separate question. Whether you can recover it depends on where Stripe charged it and where you are registered, not on your foreign consumer-sale registrations. Our guide to VAT and GST on Stripe fees in QuickBooks walks through how that tax appears and where it goes.