VAT retail schemes
If you sell to the general public, especially high quantities of relatively inexpensive items, it can be difficult, time-consuming and costly to record the VAT on every individual sale in your accounts. There are several VAT accounting schemes that retailers can use instead of accounting for VAT in the standard way. These can help simplify your retail VAT accounting.
There are a number of different standard retail schemes, or, depending on your business, you may be able to agree a bespoke VAT retail scheme with HM Revenue & Customs (HMRC). If your turnover is over certain limits, you can only use a bespoke scheme.
On this page:
- What are the VAT retail schemes?
- Who cannot use a retail scheme
- The pros and cons of using a retail scheme
- Types of retail schemes and how they work
- Apportionment schemes
- Direct calculation schemes
- Retail schemes for specific sectors
- Bespoke retail schemes
- Joining and leaving a retail scheme
- Using retail schemes with other schemes
What are the VAT retail schemes?
Using standard VAT accounting, if you are VAT-registered then you must
record the VAT on each sale in your accounting records. But with the
VAT retail schemes, you work out the value of your total VAT taxable
sales for a period - for example, a day - and the proportions of that
total that are taxable at different rates of VAT (standard, reduced
and zero) according to the scheme you are using and the VAT rates in
force for that period. You then apply the appropriate VAT fraction to
that sales figure to calculate your VAT due.
You can only use the retail scheme for supplies that you make by way of retail, and you must still issue a VAT invoice to any VAT-registered customer who requests one.
Any scheme you choose must, in the opinion of HMRC, give a fair and reasonable result in the amount of VAT paid.
Who cannot use a retail scheme
You cannot use a retail scheme if:
- your turnover is more than the maximum limit for that scheme
- you could account for VAT in the normal way without difficulty
More about VAT for retailers in VAT Notice 727
The benefits of using a retail scheme
You do not need to record VAT separately in your accounts for each and every retail sale you make. This is particularly beneficial if you make a number of low value and/or small quantity sales to the general public. This can save you a lot of time and record keeping.
More about VAT for retailers in VAT Notice 727
Types of retail schemes and how they work
There are different types of retail schemes. You can choose the standard scheme that is most suitable for your business, or you can choose different standard schemes to suit different parts of your business. Depending on the type and size of your business, you may be able to agree and use a bespoke retail scheme - that's one written especially for your business and circumstances.
Standard retail schemes
Standard retail schemes enable you to calculate your VAT due using point of sale, direct calculation or apportionment methods. Standard schemes can be used only if your annual retail turnover - excluding VAT - is under £100 million. There are lower limits for some of the standard schemes. Otherwise you must use a bespoke scheme - see the section in this guide on bespoke schemes.
Point of sale scheme
To use the point of sale scheme:
- Identify the appropriate VAT rate for each item you sell at the time of sale. For instance, you can use a till that will differentiate between goods sold at different rates of VAT - standard, reduced and zero.
- Work out your daily gross takings, which is the full value (including VAT) of all payments that you receive (or that are received on your behalf) for your retail sales.
- Identify the proportions of your daily gross takings made at each VAT rate. For instance, your till may provide these totals at the end of each day.
- To work out your VAT you multiply each of those proportions of your daily gross takings by the appropriate VAT fraction. You must use the correct rate of VAT in force for each day's takings. If the VAT rate has changed during your VAT period, you will need to make two calculations. You will have to make one calculation applying the old VAT fraction to your daily gross takings figure from the start of the period up to and including the day before the rate change, and another applying the new fraction to your daily gross takings from the day the new rate comes into force to the end of your period.
- If you give a refund on or after the date a new VAT rate comes into force for a sale you made at the old VAT rate, you will have to adjust your daily gross takings to take account of the VAT originally charged at the old VAT rate.
How to calculate VAT from VAT-inclusive amounts
More about VAT at the point of sale in VAT Notice 727/3
Apportionment schemes
There are two different apportionment schemes depending on your retail turnover.
Retail turnover - excluding VAT - of not over £1 million
To use this apportionment scheme:
- Work out the proportion of goods you buy for retail sale for each applicable rate of VAT. For example, it could be that 50 per cent of your purchases are standard rated.
- Apply those proportions to your retail sales. For example, if 50 per cent of your purchases are standard rated, then 50 per cent of your sales value is treated as standard rated.
- Calculate the VAT due on your sales, by applying the appropriate VAT fraction to the relevant portion of your retail sales figures. Ensure you use the correct VAT fraction for the VAT rate in force at the time of sale. If the VAT rate changes during your VAT period, you will have to make two calculations for that period and add the resulting amounts together to give your VAT liability for the period.
- Make the necessary annual adjustment after each year of running the scheme. If the VAT rate has changed during the year, you will have to make one calculation for each different VAT rate and then add the resulting amounts together.
This scheme cannot be used if you sell any of these:
- services
- goods that you have made or grown yourself
- catering services
How to calculate VAT from VAT-inclusive amounts
Retail turnover - excluding VAT - of not over £100 million
To use this apportionment scheme:
- Work out the Expected Selling Prices (ESPs) of goods you buy for retail sale - for example, by marking up each line or group of goods, or by using the recommended retail price. If the VAT rate changes, you will have to adjust your ESPs accordingly.
- Calculate the proportions to be sold at different VAT rates. For example, if 60 per cent of the total ESPs of goods you buy for retail sale are standard-rated and 40 per cent are zero-rated, then 60 per cent of your retail sales are treated as standard-rated and 40 per cent as zero-rated.
- Calculate the VAT due on your sales, by applying the appropriate VAT fraction to your retail sales figures. Ensure you use the correct VAT fraction for the VAT rate in force at the time of sale. If the VAT rate changes during your VAT period, you will have to make two calculations for that period and add the resulting amounts together to give your VAT liability for the period.
This scheme cannot be used if you sell services or catering services.
How to calculate VAT from VAT-inclusive amounts
More about apportionment schemes in VAT Notice 727/4
Direct calculation schemes
Direct calculation schemes are fairly simple to operate if you make a small proportion of sales at one rate of VAT and a large majority at another rate.
Retail turnover - excluding VAT - of not over £1 million
To use this direct calculation scheme:
- Work out the Expected Selling Prices (ESPs) of your goods for retail sale at the different rates of VAT - for example, by marking up each line or group of goods, or by using the recommended retail price. Generally you calculate the selling price of your 'minority goods'. These are the goods at the rate of VAT which forms the smallest proportion of your retail sales. If the VAT rate changes, you will have to adjust your ESPs accordingly.
- If your 'minority goods' are your sales that are VAT taxable, you now have the total figure for your VAT taxable sales. If your 'minority goods' are zero-rated, then deduct the total sales value of your minority goods from your daily gross takings to give you the total figure for your VAT taxable sales.
- To find the amount of VAT payable, you apply the relevant VAT fraction to this amount. Ensure you use the correct VAT fraction for the VAT rate in force at the time of sale. If the VAT rate changes during your VAT period, you will have to make two calculations for that period and add the resulting amounts together to give your VAT liability for the period.
However, you may use the total selling price of your 'majority' goods if this would be a simpler option for your business and would produce a fair and reasonable result.
You cannot use this scheme if you sell catering services.
Retail turnover - excluding VAT - of not over £100 million
To use this direct calculation scheme, you calculate your VAT in exactly the same way as if your sales were not over £1 million, except that you need to make an annual stock adjustment.
More about how to work the different direct calculation schemes in VAT Notice 727/5
Retail schemes for specific sectors
Standard retail schemes are suitable for most retail businesses. There are special arrangements and rules for:
- caterers and catering
- chemists (retail pharmacists)
- florists
More about the retail scheme adaptation for caterers in VAT Notice 727
More about the retail scheme adjustment for pharmacists in VAT Notice 727
More about the retail scheme arrangements for florists in VAT Notice 727
Bespoke retail schemes
Standard retail schemes may be used by businesses with a retail turnover - exclusive of VAT - of not more than £100 million. If your turnover is more than this, you will need to use a bespoke retail scheme.
Your bespoke scheme will usually be based on one of the standard schemes and will be tailored to meet the particular requirements of your business. You will need to agree your bespoke scheme with HMRC.
What to do if the VAT rate changes
If your scheme contains detailed provisions about the action to be taken when there is a rate change you must follow what it says. If it does not cover this, the general rule is that bespoke schemes are about valuing supplies at different rates and their terms should not be read as implying authority to account for VAT at the wrong rate. The general provisions on change of rate will apply to retailers using bespoke schemes as they apply to other VAT businesses.
More about bespoke retail schemes in VAT Notice 727/2
Joining and leaving a retail scheme
Joining a retail scheme
You can join a retail scheme at the beginning of any VAT tax period. You do not need to complete an application form.
You can change schemes at the end of each year on the anniversary you joined the scheme. You can also change schemes before the end of a complete year, providing you meet certain criteria.
Leaving a retail scheme
You can leave any retail scheme voluntarily at the end of any VAT period.
If you leave the point of sale scheme, apportionment scheme for businesses with turnover not over £100 million, or the direct calculation scheme for businesses with turnover not more than £1 million, you will not usually need to make an adjustment for VAT payments. If you leave one of the other schemes, you must make a closing adjustment.
More about VAT for retailers in VAT Notice 727
Using retail schemes with other schemes
You can use a retail scheme together with the Cash Accounting Scheme and/or the Annual Accounting Scheme. You can't use a retail scheme with the Flat Rate Scheme, but that scheme does have its own retail version. You can't use a retail scheme with the margin schemes.
Annual Accounting Scheme
Using annual VAT accounting, you make nine monthly or three quarterly interim payments throughout the year. You only need to complete one VAT Return at the end of the year when you either make a balancing payment or receive a balancing refund.
Get information on the Annual Accounting Scheme
Cash Accounting Scheme
Unlike standard VAT accounting where VAT is due when you issue an invoice, using cash accounting you don't have to pay VAT until your customers pay you.
Get information about the Cash Accounting Scheme
Flat Rate Scheme
Using the Flat Rate Scheme you simply pay a fixed percentage of your turnover as VAT.
Get information about the Flat Rate Scheme
Margin schemes for second-hand goods, art, antiques, collectibles
If you buy or sell second-hand goods, antiques, collectibles or art, you only need to account for VAT on the difference between the price you paid for an item and the price at which you sell it - your margin.
Get information about the second-hand goods margin schemes
Tour Operator's Margin Scheme
The Tour Operator's Margin Scheme makes VAT accounting easier for tour operators that buy and sell travel, accommodation and certain other services internationally.
