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As most retailers sell a high volume of lower priced commodities, some subject to zero rate and some standard rate VAT, HMRC has created a number of special schemes that simplify the calculation of VAT due.
What schemes are available?
Standard retail schemes are suitable for most retail businesses. However, there are special arrangements and rules for caterers and catering, chemists and florists.
There are three main categories of published, standard retail schemes and a DIY version:
1. Point of sale scheme: businesses calculate the tax due on sales by identifying the correct VAT liability at the time a sale is made. This is usually done by way of an electronic till system that can differentiate between goods sold at different VAT rates.
2. Apportionment schemes:
Number 1: Only suitable for businesses whose total tax exclusive turnover from retail sales does not exceed £1m per annum. The scheme is relatively simple to use and looks at the value of a retailer's purchases for resale at each VAT rate, and applies these proportions to total sales.
Number 2: Under this scheme, businesses calculate the Expected Selling Prices (ESPs) of standard and lower-rated goods they receive for retail sale. The ratio of ESPs to all goods is then used to calculate what proportion of DGT relates to VAT on sales of standard and lower rated goods.
3. Direct calculation schemes:
Number 1: The first version of the scheme is available to businesses with a tax exclusive turnover of up to £1 million. Under this scheme businesses calculate the ESP of goods for retail sale at one or more rates of VAT so that they can calculate the proportion of takings on which VAT is due.
Number 2: Works in the same way as the first scheme except that businesses need to make an annual stock adjustment. Businesses can use the scheme if their annual tax exclusive retail turnover does not exceed £130 million.
4. Bespoke schemes: Retailers with turnover in excess of £130m can design their own system. Usually they are based on a published scheme and will need to demonstrate that the scheme is fair and reasonable.
Note: Businesses that achieve a higher mark-up for zero-rated goods may find that the apportionment scheme would result in them paying more VAT to HMRC than would otherwise have been the case.
Which scheme to use?
It is probably best to test the various schemes by applying them to real data and see which produces the best result.
Disclaimer – Please note: The ideas shared with you in this article are intended to inform rather than advise. Taxpayers’ circumstances do vary and if you feel that tax strategies we have outlined may be beneficial it is important that you contact us before implementation. If you do or do not take action as a result of reading this article, before receiving our written endorsement, we will accept no responsibility for any financial loss incurred.
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