Get free updates - subscribe to our monthly newsletter Subscribe
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.
If you like this article and would like our FREE updates sent straight to your inbox then subscribe to our monthly newsletterSubscribe
All content © 2015 Armstrong Watson. All Rights Reserved. Website by Simon Pighills.
Armstrong Watson LLP is a limited liability partnership registered in England and Wales, number OC415608. The registered office is 15 Victoria Place, Carlisle, CA1 1EW where a list of members is kept. Armstrong Watson LLP is regulated by the Institute of Chartered Accountants in England and Wales for a range of investment business activities. Unless otherwise indicated, either expressly or by the context, we use the word “partner” to describe a member of Armstrong Watson LLP or an employee of Armstrong Watson LLP in their capacity as such.
Armstrong Watson Audit Limited is registered to carry on audit work in the UK and Ireland by the Institute of Chartered Accountants in England and Wales. Registered as a limited company in England and Wales, number 8800970. The registered office is 15 Victoria Place, Carlisle, CA1 1EW.
Armstrong Watson Financial Planning Limited is authorised and regulated by the Financial Conduct Authority. Firm reference number 542122. Registered as a limited company in England and Wales, number 7208672. The registered office is 15 Victoria Place, Carlisle, CA1 1EW. Armstrong Watson Financial Planning & Wealth Management is a trading style of Armstrong Watson Financial Planning Limited.
Armstrong Watson Trustees Limited is a limited company registered in England and Wales, number 84495656. The registered office is 15 Victoria Place, Carlisle, CA1 1EW.