VAT Retail Schemes

Introduction

VAT retail schemes are simplified methods for calculating VAT on sales to the public. If you run a shop or retail business and cannot work out the VAT on each individual sale, these schemes let you calculate VAT once per VAT return period instead of transaction-by-transaction. There are three standard schemes to choose from, plus bespoke arrangements for larger businesses.

Who can use VAT retail schemes

Retail schemes are designed for VAT-registered businesses that sell goods or services to consumers and cannot use normal VAT accounting. Normal accounting means identifying the VAT-exclusive value and the VAT amount for each sale and producing periodic totals — you don't need to issue tax invoices to non-VAT-registered customers, but you must be able to separate out the figures.

Retail schemes only apply to retail sales. If you make a mixture of retail and non-retail sales (such as sales to other VAT-registered businesses), you must use normal accounting for the non-retail sales and can only use a retail scheme for your retail sales.

You must issue a tax invoice to any VAT-registered customer who requests one, and these sales should normally be accounted for using normal accounting rules unless they're occasional or use a less detailed VAT invoice.

Turnover limits

All standard retail schemes have a maximum turnover limit of £130 million (excluding VAT) per year. If your annual retail turnover exceeds this amount, you cannot use any of the standard schemes and must instead agree a bespoke retail scheme with HMRC.

If you think your turnover is approaching £130 million, contact HMRC as soon as possible to arrange a bespoke scheme. The start date can only be backdated in exceptional circumstances and only with HMRC's agreement.

The Point of Sale Scheme

The Point of Sale Scheme works by identifying the correct VAT rate at the time you make each sale. This usually means using a till system that can distinguish between goods sold at different VAT rates, though you can use any system that separates your sales — for example, using separate tills for different rates.

Once your system has produced the total value of sales at each rate, you calculate your output tax by applying the appropriate VAT fraction to the relevant portion of your daily gross takings. For standard-rated goods at 20%, divide the sales total by 6. For reduced-rate goods at 5%, divide by 21.

If you make only standard-rated sales or only reduced-rated sales, you must use this scheme. It's potentially the simplest and most accurate scheme, but electronic tills can be expensive and you and your staff need to operate the system correctly even during busy periods.

The Apportionment Schemes

The Apportionment Schemes (there are two versions) are designed for businesses that buy goods for resale. You cannot use these schemes if you provide services, sell goods you've made or grown yourself, or provide catering services.

Apportionment Scheme 1 is designed for smaller businesses with annual VAT-exclusive retail turnover up to £1 million. The scheme works by calculating what proportion of your purchases falls into each VAT rate, then applying these proportions to your total sales to work out VAT due.

Apportionment Scheme 2 is for businesses with annual retail turnover between £1 million and £130 million (excluding VAT).

Under both schemes, you calculate the total value of goods purchased for resale in the VAT period for each VAT rate, then work out what percentage of your total purchases each rate represents. You then apply these percentages to your total sales and use the VAT fractions to calculate the tax due.

The Direct Calculation Schemes

The Direct Calculation Schemes are suited to businesses that make a small proportion of sales at one VAT rate and the majority at another rate. Like the Apportionment Schemes, there are two versions based on turnover.

Direct Calculation Scheme 1 is for businesses with annual VAT-exclusive retail turnover up to £1 million.

Direct Calculation Scheme 2 is for businesses with annual retail turnover between £1 million and £130 million (excluding VAT). If you use Direct Calculation Scheme 2, you must make an annual stock adjustment.

These schemes work by calculating the expected selling prices (ESPs) of either your minority or majority goods (whichever is easier to track). You total up the ESP for the VAT period, then calculate the VAT due on your sales by deducting the ESP of zero-rated or reduced-rate goods from your total sales before working out the VAT at the standard rate.

Bespoke retail schemes

A bespoke retail scheme is a method tailored to meet the needs of large businesses with annual VAT-exclusive retail turnover exceeding £130 million. These schemes are usually based to a greater or lesser extent on one of the standard published schemes but adapted for your particular circumstances.

You must use a bespoke scheme if you're ineligible for the standard schemes and unable to use normal accounting. HMRC will expect your bespoke agreement to include a legal framework statement, specify how output tax will be calculated, detail which supplies are covered, and include appropriate signatures from both parties.

Bespoke agreements will remain in effect until both parties agree it should cease or either party gives written notice.

Choosing and changing schemes

You can join a retail scheme at the beginning of any VAT period and you don't need to tell HMRC. As long as your chosen scheme produces a fair and reasonable result, you may choose whichever scheme suits your business best. Consider factors such as the complexity of calculations, paperwork requirements, record-keeping, and stock-taking needs.

You must use a scheme for at least 12 months before changing to another scheme, unless you become ineligible for your current scheme or HMRC allows or requires an earlier change. If you become ineligible for a scheme, you must stop using it from the end of your next complete accounting period.

Retrospective changes to retail schemes are not normally allowed. HMRC may allow retrospective changes only in exceptional cases, with a maximum recalculation period of four years.

Compatibility with other schemes

You can use a retail scheme together with the Cash Accounting Scheme and the Annual Accounting Scheme. However, you cannot use retail schemes with the Flat Rate Scheme.

Record keeping

All retail schemes require you to keep daily gross takings (DGT) records. Depending on which scheme you use, you may also need to keep expected selling price (ESP) records. You must be able to provide an individual VAT invoice if a customer asks for one.

Sources

• VAT retail schemes
• Retail schemes (VAT Notice 727)
• Point of Sale VAT Retail Scheme (VAT Notice 727/3)
• Apportionment VAT Retail Schemes (VAT Notice 727/4)
• Direct Calculation VAT Retail Schemes (VAT Notice 727/5)
• Bespoke VAT retail schemes (VAT Notice 727/2)

This article provides general guidance based on current HMRC rules. For advice specific to your situation, speak to your accountant.