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Input tax is one of the most important concepts in global tax compliance, but it’s also often misunderstood by finance leaders in today’s SaaS and AI startups. Mismanaging input tax can lead to cashflow issues, tax audits, and missed refund opportunities.
Here’s what you need to know about input tax, how to handle input tax region by region, and how to reclaim input tax owed without running into tax compliance headaches.
Input Tax vs Output Tax: What’s the Difference?
What is Input Tax?
Input tax is the value added tax (VAT) or goods and services tax (GST) a business pays on purchases they use for business purposes. This can include things like products they plan to resell, or items, software, or equipment they’ll use in the course of business.
It’s important for a business to track all input tax paid, because the funds are often reclaimable, meaning that good bookkeeping can mean bigger profit margins, especially in countries like Hungary, where VAT can be as high as 27%.
What is Output Tax?
Output tax is the tax charged by a business to their customers. Examples around the globe include sales tax in the US, and GST or VAT in most other countries around the world. Businesses collect this tax from customers and then pass it on to the appropriate taxing authority.
Why This Difference Matters
One of the core tenets of tax compliance is reconciling input vs. output tax. Input tax must be tracked in order to reclaim, where applicable, refunds. And output tax must be collected at the correct rate and then passed on to taxing authorities to avoid penalties and interest.
It’s important to note that only VAT-registered businesses can claim input tax credits.
Tax liability is tallied up in each taxing jurisdiction when it comes time to remit your output tax to the taxing authority. To figure out how much tax you must pay, or how much refund you should receive, use this formula:
Output tax collected - input tax credits = total tax payment
<div class="disclaimer">Note that this formula is simplified and other factors may also affect your tax due.</div>
How Input Tax Works in Practice (Step-by-Step)
Step 1: Collect Valid Invoices and Receipts
Gather all tax invoices related to business expenses. Note that each must show the supplier’s tax ID, amount of VAT or GST charged, and correct billing info. Credit card slips or incomplete invoices are not valid proof for input tax claims.
Step 2: Verify Supplier Tax Details
Confirm that each supplier has an up-to-date VAT or GST registration. Invalid supplier info can lead to rejected claims at the time of filing or during an audit. Use a solution like Sphere to make the validation process quick and painless.
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Step 3: Calculate Total Eligible Input VAT
Add up all VAT paid on qualifying business expenses. Remember this does not include non-applicable expenses like:
- Personal or entertainment expenses
- Items tied to VAT or GST exempt activities (these are not eligible for input recovery)
Also note that for any mixed expenses you’re only allowed to claim the business-use portion of the expense.
Step 4: Offset Input Tax Against Output Tax
Subtract input tax from output tax for the filing period. Note that in most cases, your taxing authority’s tax payment portal will ask for your inputs and outputs and make this calculation for you.
If your output is greater than your input, you’ll pay the difference to the taxing authority.
If your input is greater than your output, you can carry the balance forward or request a refund.
Note that taxing authorities scrutinize tax refunds carefully. Excess claims can trigger an audit. Even if you are claiming the correct amount in input tax credits you must have the papertrail to back those claims up.
Step 5: File Returns and Keep Records
Once you’ve calculated how much VAT or GST you either owe or can claim as a refund, file your return. The frequency with which you file depends on factors like the jurisdiction and how much revenue you make, but it’s generally monthly or quarterly.
Always maintain supporting documents, like invoices, receipts, and VAT checks, for complete audit-readiness.
Regional Differences: Input Tax in the US, UK & Canada
United States
Input tax doesn't exist in the U.S. sales tax model. Instead, in the US you can present a resale certificate and ask to purchase items for resale tax free. Because US sales tax is paid by the end user of the goods (or sometimes services) sold, businesses buying items for resale are not required to pay tax.
Items for business use, such as equipment, software, or office supplies, are still subject to sales tax if your business is the end user, no matter if you plan to only use them for business purposes.
In some cases, you’ll be required to pay sales tax when you weren’t legally obligated to. This can happen if a vendor won’t accept your valid resale certificate for any number of reasons. In that case, you can claim a credit on your tax filing. Though it’s vital to document the tax paid in order to make that claim.
On the flip side, you may also not be charged tax when you should have. In this case, you’re required to self-assess use tax. For example, if an out-of-state retailer does not charge your business sales tax on an item, you’re then required to pay the equivalent of that sales tax (i.e. the “use tax”) on your next tax return. Be sure to self-assess use tax, as it’s one of the first things auditors look for should your business ever come under scrutiny from US state taxing authorities.
United Kingdom (VAT System)
Unlike the US, the UK operates on a VAT system where businesses can reclaim input tax on most business purchases. If you are VAT-registered in the UK, you can recover VAT paid not just on items you plan to resell, but on business expenses like software subscriptions, cloud services, equipment, and supplies.
Simply total up the VAT you paid as shown on valid invoices from your suppliers, then offset that against the VAT you collected from your customers. The difference determines whether you remit VAT on your next HMRC return or get a refund.
However, some VAT administrations can make VAT refunds tricky. They include:
- Zero-rated items – These are taxed at 0% VAT (like exports outside the UK), and the good news is you can still reclaim all input tax on expenses related to these sales. So even though you're not charging VAT to customers, you get full recovery on your business expenses.
- VAT exempt sales - Some products and services, like financial services, are considered VAT exempt. There’s no input tax recovery allowed when it comes to these items.
The Flat Rate Scheme might seem appealing for simplicity - you pay a fixed percentage of your gross sales as VAT. But there's a major catch: you can't reclaim input tax on most purchases. For SaaS startups with significant expenses on development tools, cloud infrastructure, and professional services, this scheme often costs more than it saves. The only exception is capital assets over £2,000, where you can still reclaim VAT even under the Flat Rate Scheme.
Canada (GST/HST System)
Similar to the UK, Canada also allows GST-registered businesses to track input tax, offset it against output tax, and pay (or claim) the difference on their GST return.
However, Canada’s provincial taxes add some complexity to this process.
The provincial landscape adds complexity. Some provinces use the harmonized sales tax (HST) which combines federal and provincial tax into one rate - like Ontario at 13% or Nova Scotia at 15%. Others keep them separate, charging GST alongside a provincial sales tax (PST) that you can't reclaim as an input tax credit (ITC). For example, in British Columbia there’s a 5% GST (which is recoverable) and a 7% provincial sales tax (PST), which is generally not recoverable.
For SaaS companies, most standard business expenses like cloud hosting, software subscriptions, equipment and professional services, are eligible for input VAT recovery. Other expenses, like hotels and transportation for business travel are also recoverable. But many expenses, such as paying employees or financing costs and interest payments, are not recoverable.
What Can (and Can’t) Be Claimed as Input Tax
Input tax recovery-eligible items vary by jurisdiction, but there are some commonalities.
Commonly Eligible Expenses
When purchased for business use, expenses like software, hardware and equipment, rent, and contractor services are generally eligible for input VAT recovery.
Disallowed or Restricted Items
Purchases for personal use, entertainment, and some meals (even client meals) are commonly disallowed when it comes to input VAT recovery.
When claiming an input VAT refund on a questionable item, taxing authorities are liable to investigate the transaction closely. That’s why it’s vital to have full invoices in order to claim the refund.
Documentation Requirements
Collect valid tax invoices with the purchase date, purchase price, amount of VAT charged, and the seller’s tax ID number in order to stay VAT compliant. Missing our incomplete invoices will serve as a red flag to taxing authorities who may then place your business activities under further scrutiny.
Common Pitfalls When Managing Input Tax
Tax teams run into some common issues when claiming input VAT refunds.
No or Invalid Invoices
Claiming VAT refunds without valid documentation to back up the claim is the top reason for refund rejection. Keep all invoices and preemptively verify your suppliers’ tax ID numbers to ensure that the taxing authority won’t find a reason to deny your claim.
Claiming Non-Eligible Items
Refund eligibility varies by jurisdiction, so it can be simple to accidentally claim a refund on an item that’s eligible in one jurisdiction but not in another one. Further, sometimes transactions, such as personal expenses purchased from a vendor where you usually purchase business expenses, can lead to mixups and invalid claims.
Scrupulous recordkeeping and clear spending policies in your business will ensure that you don’t draw undue attention with invalid input VAT claims.
VAT Registration Errors
Barring some special circumstances, non-VAT registered companies cannot claim input tax refunds. That’s even if they paid the tax into the system.
This includes tax you paid into the system before your business was liable to register for VAT in that country or jurisdiction.
Because of this, it’s important to ensure that you register for VAT at the right time for your business. While some countries require registration upon your first sale into the country, others have monetary thresholds such as Australia’s $75,000 AUD requirement, before you’re liable to register.
Some countries allow businesses who don’t yet meet the mandatory VAT requirement threshold to register for VAT earlier so they can claim their input tax credits. This is especially useful for businesses that are just starting up and may be making many input credit eligible purchases before they are required to register for VAT.
Foreign VAT Refund Opportunities
Some special circumstances allow non-registered companies to reclaim VAT paid in countries where they are not registered.
If you travel to a country for business and pay VAT, or pay VAT on a software subscription based in a country where your business is unregistered, you may be able to recover that VAT. And it’s important to keep track of these expenses, because foreign VAT, often 20% or more, can eat into your business’s bottom line fast.
For example, the EU's 13th Directive, or Directive 2008/9/EC, has created a standardized refund process for businesses located outside the EU. But note that each country has a minimum claim amount (usually between €50-400 per year), and you must generally file by 30 September annually in order to make your claim for VAT paid in the previous calendar year.
Other countries have similar programs. While the paperwork may be time-consuming, if it saves your business 20% or more on major expenses, it’s likely worth it to make your claim.
How Global SaaS Companies Can Stay Compliant
Multi-Country Registrations & Returns
The first step to compliance is understanding each country’s requirements, including when and how to register, VAT refund timelines, and rules about what is and isn’t refundable.
While business expenses in general are eligible for input VAT credits, what exactly is considered a business expense can vary widely. For that reason, it’s difficult to scale VAT compliance manually, especially as you begin dealing with VAT in multiple countries.
Fortunately, automation can ensure you’re getting all your input tax credits while avoiding the pitfalls of incorrect claims.
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Staying Current with VAT/GST Rules
VAT rates and rules also change frequently. Multiply that with dealing with VAT, GST, or sales tax in multiple countries and your work just gets more complicated. And that's often compounded for SaaS or digital product sellers because, as the space grows, many jurisdictions have implemented special rules just for online businesses.
VAT compliance automation can not only keep you up to date with rules in countries where you are already registered, but alert you when your business has a VAT liability in a new country.
Audit Risks & Input Tax Scrutiny
Tax authorities closely guard their tax dollars. They’re especially scrupulous when it comes to refund claims. Input VAT credits are closely vetted, and incorrect claims can be denied or even raise the red flag for an audit of your entire operations.
Maintain through, complete, and traceable documentation. Always validate your suppliers’s VAT, GST or other tax ID. And stay prepared should you ever face an audit letter.
Using Automation to Manage Input Tax
Fortunately, SaaS companies aren’t left to their own devices when it comes to input VAT. Solutions like Sphere automate VAT filing, including how much your company owes and, by Q4 2025, any input VAT claims you can make.
Further, Sphere’s upcoming feature includes real-time logic that flags non-deductible or risky claims. That’s an extra layer of protection between you and suspicious taxing authorities.
And handling input claims is just one way Sphere automates your business’s sales tax, VAT, and GST. Unlike traditional sales tax software, which tends to focus on one country or tax system, Sphere’s platform is leveraging AI combined with international tax experts to handle sales, VAT, GST and other indirect taxes whether you sell to customers in the US, Japan, South Africa, or anywhere else around the world.
Sphere alerts you when you have a tax obligation in a new country or jurisdiction, registers for you, integrates with your billing system to ensure you’re collecting the right amount of tax, and files your sales tax, GST or VAT return for you with the right taxing authority by your due date.
The Bottom Line: Input Tax Done Right Pays Off
Input tax reduces your business’s indirect tax liability, but unless meticulously managed it can also become a compliance headache. For globally scaling SaaS companies, reclaiming input tax dramatically improves cash flow, but can also throw up a red flag to taxing authorities.
Automation allows you to keep up with rules, regulations, and documentation required across jurisdictions–allowing you to grow your business compliantly.
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