Apportionment VAT Retail Schemes (VAT Notice 727/4)
Find out the general rules for the Apportionment Retail Schemes (1 and 2), how the scheme works, records you must keep and how to work out your VAT.
Detail
This notice cancels and replaces Notice 727/4 (June 2018).
This notice applies to supplies made on or after 1 January 2021. It applies to supplies of:
- services made within and between Great Britain and Northern Ireland
- supplies of goods made within Great Britain and within Northern Ireland References to UK should be construed accordingly.
Exports of goods from Great Britain and Northern Ireland are covered in Notice 703 Exports.
Sales of goods between Northern Ireland and the EU are covered in Notice 725 Single Market.
1. Overview
1.1 What this notice is about
This notice tells you about Apportionment Schemes 1 and 2, (these are 2 of the standard retail schemes). It explains the general rules applicable to the schemes, how the schemes work (including the calculation of VAT), and what records you should keep - especially your daily gross takings (DGT) records and, for Apportionment Scheme 2, your expected selling prices (ESP) records.
1.2 Who should read this notice
You should read this if:
- you’re a VAT-registered business making retail sales
- you are unable to account for VAT on those sales in the normal way see paragraph 2.2
- your annual retail turnover, excluding VAT, does not exceed £130 million
1.3 Other retail schemes
The other standard retail schemes are the Point of Sale Scheme and the Direct Calculation Scheme.
Businesses whose annual retail turnover exceeds £130 million cannot use a standard scheme. Instead they can agree a bespoke retail scheme, see paragraph 2.8.
You will find a general introduction to retail schemes as well as guidance on choosing a retail scheme in Notice 727.
Details of the other schemes can be found in:
- Notice 727/2 for bespoke VAT retail schemes
- Notice 727/3 for Point of Sale VAT Retail Scheme
- Notice 727/5 for Direct Calculation VAT Retail Schemes
1.4 Force of law
Parts of this notice have the force of law under powers contained in regulations 66 to 75 of the VAT Regulations 1995 (the Regulations) that enable the Commissioners to determine a retail scheme method in a notice published by them.
Paragraphs 2.6, 2.8, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 4.2, 4.3, 5.2, 5.3, 5.3.2, 5.4.1, 5.4.2, 5.4.3, 5.4.4, 5.4.5, 6.1, 6.3, 7.3.1, 7.3.2, 7.3.3, 7.5 7.7, 7.24, 7.25 and 8.4.3 have the force of law.
The text concerned is noted accordingly.
2. General rules
2.1 Who can use a retail scheme
Retail is the selling of goods or services to consumers and retail schemes are aimed at retailers that cannot account for VAT using normal accounting.
2.2 Normal accounting for VAT
Accounting for VAT in the normal way does not require you to issue a tax invoice to unregistered customers, but it does require you to identify, for each sale, the tax exclusive value and the VAT and to be able to produce periodic totals of those amounts.
2.3 Choosing a retail scheme
Some of the schemes have turnover limits, see paragraph 3.2 for guidance on when to use the apportionment schemes.
Otherwise, as long as your chosen retail scheme produces a fair and reasonable result you may choose a scheme which suits your business best. Notice 727 tells you more about choosing a retail scheme.
2.4 What to account for using the schemes
Under the Regulations, you can only use the retail schemes to account for retail sales.
If you make a mixture of retail and non-retail sales you must only use a retail scheme to calculate the tax due on your retail sales. You must account for tax due on non-retail sales using the normal method of accounting.
2.5 What you must do if you make sales to other VAT-registered businesses
You must issue a tax invoice to VAT registered customers. Invoicing is explained in sections 16 and 17 of Notice 700.
These sales should be accounted for under normal accounting rules unless they are of an occasional nature or made using a less detailed VAT invoice (read paragraph 16.6 of Notice 700).
2.6 When you can change schemes
Under the regulations, you can change schemes at the end of a complete year, reckoned from the beginning of the tax period in which you first adopted the scheme. But, you must use a scheme for 12 months, unless either:
- you become ineligible for the scheme you are using
- HMRC allows or requires an earlier change
The following sentence has the force of law.
If you become ineligible to use a scheme you must cease using the scheme from the end of the next complete accounting period.
For example, if you account for VAT by reference to quarters ending March, June, September and December and your turnover makes you ineligible for a particular scheme during February, you must cease to use that scheme to account for supplies made on or after 1 July.
Some of the schemes require adjustments when you cease using them, see paragraph 3.6 for guidance on adjustments needed under the apportionment schemes).
2.7 Changing schemes retrospectively
Retrospective changes to retail schemes are not normally allowed. The VAT and Duty Tribunals have repeatedly confirmed the principle that where you operate a scheme according to the published rules (or an agreed variation), the tax which is due under that scheme is the correct VAT for the period.
You cannot change schemes retrospectively simply because another scheme produces a lower or different valuation.
HMRC may allow retrospective change in exceptional cases. If you think you have exceptional grounds for a retrospective change you should contact VAT general enquiries giving as much detail as possible.
The maximum period for recalculation following a retrospective change of scheme is 4 years and you must have been, and remain, eligible to use the new scheme during the full period which your application relates to.
2.8 Exceeding the scheme’s turnover limit
The first paragraph has the force of law.
Businesses whose annual turnover from all retail sales exceeds £130 million cannot use any of the standard retail schemes including the apportionment schemes. Instead, they can agree a bespoke retail scheme.
If you think your annual retail turnover (excluding VAT) is about to exceed £130 million, you should contact HMRC as soon as possible to agree a bespoke retail scheme. A bespoke retail scheme will be tailored to meet the particular requirements of your business and is likely to be a variation of one of the published standard schemes. For further information see Notice 727/2: bespoke retail schemes.
2.9 Retail sales of goods between Northern Ireland and Great Britain
Retailers selling or delivering goods to customers in other parts of the UK should charge and account for VAT as normal.
3. The Apportionment Schemes 1 and 2
Unless stated otherwise, this section applies to both Apportionment Schemes 1 and 2.
3.1 How the apportionment schemes work
3.1.1 Apportionment Scheme 1
Apportionment Scheme 1 is the simpler scheme designed for smaller businesses with a tax exclusive retail turnover not exceeding £1 million (for further information see paragraph 3.5).
Under this scheme, you work out the value of your purchases for retail sales at different rates of VAT and apply the proportions of those purchase values to your sales.
Your takings are treated as standard-rated, reduced-rated and zero-rated in the same proportions if for example:
- 50% of the value of your goods purchased for retail sale are standard-rated
- 30% are lower-rated
- 20% zero-rated
You then calculate your output tax by applying the relevant VAT fraction (or fractions if more than one positive rate is used) to these positive-rated takings figures.
Once a year you must make a similar calculation based on your sales and purchases for the whole year. This is compared with the tax you have paid to correct any over or under payment.
This scheme is relatively simple. But, if, on average, you achieve a higher mark-up for your zero-rated goods than your reduced or standard-rated goods, you may find that you pay more tax if you use Apportionment Scheme 1 than you would using another scheme.
3.1.2 Apportionment Scheme 2
Apportionment Scheme 2 is available to businesses with a retail turnover, excluding VAT, not exceeding £130 million. Under this scheme you calculate the ESP of standard and reduced-rated goods you receive for retail sale (paragraph 5.3) then work out the ratio of these to the ESP of all goods received for retail sale and apply this ratio to your takings.
For example, 60% of your takings are treated as standard-rated and 40% as zero-rated if:
- 60% of the ESPs of all goods you receive for retail sale are standard-rated
- 40% are zero-rated
You then calculate your output tax by applying the relevant VAT fraction to these figures for takings.
This scheme works on a rolling 12-month period, that is, at the end of every VAT period, the calculation apportions that period’s DGT by the total ESP of the previous 12 months.
This scheme can be complex to operate but, if operated correctly, will provide a more accurate valuation of your supplies than Apportionment Scheme 1 over a period of time.
3.2 When to use the apportionment schemes
Paragraph 3.2 has the force of law.
You can use an apportionment scheme if you are a retailer making supplies at 2 or more VAT rates and you can identify the correct liability of the purchases at the time you make them.
If you only supply goods at 1 rate (that is, all zero-rated, all reduced-rated or all standard-rated) you must use the Point of Sale Scheme.
If you supply services or catering, you will need to account for them outside the scheme.
Apportionment Scheme 1 cannot be used for supplies of goods you have made or grown yourself and you will need to account for them outside the scheme.
3.3 Using other schemes with the apportionment schemes
Normally, a retail scheme uses a single calculation for the whole of your VAT registration. But, you can use the same scheme separately at a number of distinct business locations or use a number of schemes at the same location, provided that you make any necessary adjustments to account for transfers of goods between schemes, and you agree the details of how this will be done with HMRC.
You can always use the normal method of accounting together with any scheme or any allowable mixture for which you’re eligible.
The next 2 bullet points have the force of law.
Provided you are eligible to use the schemes:
- you can mix the Point of Sale Scheme with either of the apportionment schemes
- you cannot use different versions of the apportionment scheme at the same time and you must not mix a direct calculation scheme with an apportionment scheme
3.4 Keeping records
Section 5 gives examples of what should be included in your DGT.
The normal record keeping requirements also apply.
The following bullet points have the force of law.
For both Apportionment Schemes 1 and 2 you must keep a record of:
- your sales - DGT
- any adjustments you make to the totals
- a record of your purchases by VAT liability
- any working papers you use to calculate your output tax
For Apportionment Scheme 2 you must also keep a record of your ESP.
3.5 If you exceed the turnover limit
The turnover limit for the scheme applies to the whole of your VAT registration.
Scheme 1 turnover limit
The first paragraph has the force of law.
If your turnover is over £1 million, you must cease to use Apportionment Scheme 1 unless you expect your turnover to be below £1 million in the following 12 months and HMRC agree to you remaining on Scheme 1.
Apportionment Scheme 1 is available to businesses with an annual tax exclusive turnover not exceeding £1 million. If you think your turnover is about to exceed £1 million, you should consider moving to Apportionment Scheme 2 or any of the other standard retail schemes (paragraph 2.3).
But if you can show that you do not expect your turnover to remain over £1 million in the coming year, HMRC may agree to you remaining on Apportionment Scheme 1.
3.6 Ceasing to use the scheme
Paragraph 3.6 (including sub-paragraphs) has the force of law.
3.6.1 Apportionment Scheme 1
When you cease to use Apportionment Scheme 1, you must perform a closing adjustment (see paragraph 4.3.2), even if you leave before your scheme’s first anniversary. This closing adjustment should be calculated using the same method as the annual adjustment.
3.6.2 Apportionment Scheme 2
When you cease to use Apportionment Scheme 2, no adjustment is normally required. But, if you cease to use the scheme in a part of your business but continue to use it in other parts, you must make sure that the rolling calculation reflects the stock or ESP now excluded from the apportionment calculation.
3.7 Other rules when stopping the schemes
Apart from making the adjustments as explained in paragraph 3.6, you should also (the first bullet point has the force of law):
- only include goods sold by retail in your scheme, if you transfer part or all of your business as a going concern and you cease to use the scheme, you will have to exclude the value of the stock which has been transferred from your retail scheme
- make additional adjustments may be required where unusual patterns of trade prevent your chosen scheme from producing a fair and reasonable result
3.8 Operating the scheme
You’re responsible for ensuring that any staff you employ are able to operate your systems correctly, even at the busiest times. If you operate the scheme incorrectly, you could declare the wrong amount of VAT and be subject to an assessment and a financial penalty.
4. Mechanics of Apportionment Scheme 1
4.1 Calculating VAT under Apportionment Scheme 1
The scheme works by applying the appropriate VAT fractions to your totals of standard rate and reduced rate DGT to establish the amount of tax that is due on your eligible retail sales. This gives you your scheme output tax. Section 6 explains the DGT rules in detail.
The VAT fraction is simply a way of calculating the amount of VAT contained in the total gross takings. Notice 700 tells you more about the VAT fraction.
4.2 Starting to use Apportionment Scheme 1
Paragraph 4.2 has the force of law.
When you start to use the scheme, you must not include goods you have in stock as goods received in the period, but, if you have stock items which you intend to sell and not restock, you must include these in your calculation, unless these goods have already been allowed for by you in a previous scheme.
4.3 Step-by-step scheme calculations
Paragraph 4.3 (including subparagraphs) has the force of law.
The following is a step-by-step guide to how you must calculate your VAT using this scheme and how to do the annual adjustment.
4.3.1 Your VAT calculations for Scheme 1
For each tax period make your scheme calculation as follows:
| Step | Calculation | Amount |
|---|---|---|
| Step 1 | Add up your DGT for this tax period (see section 6) | £__ |
| Step 2 | Add up the cost, including VAT, of all goods received in the period for retail sale at the standard rate | £__ |
| Step 3 | Add up the cost, including VAT, of all goods received in the period for retail sale at the reduced rate | £__ |
| Step 4 | Add up the cost, including VAT, of all goods received in the period for retail sale at standard, reduced and zero rates | £__ |
Use these figures to work out what proportion of your DGT comes from sales at the different rates by performing the following calculation:
| Step | Calculation | Amount |
|---|---|---|
| Step 5 | (Total at step 2 ÷ total at step 4) × total at step 1 × 1/6 (VAT at 20%) | £__ |
| Step 6 | (Total at step 3 ÷ total at step 4) × total at step 1 × 1/21 (VAT at 5%) | £__ |
| Step 7 | Add together the totals at step 5 and step 6. This is your output tax for Apportionment Scheme 1 | £__ |
4.3.2 Annual adjustment for Scheme 1
For each tax year make your scheme adjustment as follows:
| Step | Calculation | Amount |
|---|---|---|
| Step 1 | Add up the DGT for the year | £__ |
| Step 2 | Add up the cost to you, including VAT, of goods at the standard rate of VAT received for retail sale during the year | £__ |
| Step 3 | Add up the cost to you, including VAT, of goods at the reduced rate of VAT received for retail sale during the year | £__ |
| Step 4 | Add up the cost to you including VAT of all goods, standard, reduced and zero-rated, received for retail sale during the year | £__ |
Use these figures to work out what proportion of your DGT comes from sales at the different rates by performing the following calculation:
| Step | Calculation | Amount |
|---|---|---|
| Step 5 | (Total at step 2 ÷ total at step 4) × total at step 1 × 1/6 (VAT at 20%) | £__ |
| Step 6 | (Total at step 3 ÷ total at step 4) × total at step 1 × 1/21 (VAT at 5%) | £__ |
| Step 7 | Add together totals at step 5 and step 6 | £__ |
| Step 8 | Add together the amount of output tax calculated under the retail scheme in the tax periods during the year | £__ |
| Step 9 | If the total at step 7 is more than the total at step 8 you have paid too little tax and you should show the difference in the VAT payable side of your VAT account for the period covering the adjustment. If the total at step 7 is less than the total at step 8 you have paid too much tax and you should show the difference in the VAT Deductible side of your VAT account for the period covering the adjustment | £__ |
4.3.3 Annual adjustment timetable for Scheme 1
For the purposes of this scheme you must make the annual adjustment on the VAT Return covering the end of the tax year as follows:
| Tax period ending | Your tax year ends |
|---|---|
| If you make monthly returns | 31 March |
| On the last day of June, September, December or March. | 31 March |
| On the last day of July, October, January or April. | 30 April |
| On the last day of August, November, February or May. | 31 May |
If you’ve been using the scheme for 1 tax period or less, you do not have to make the first adjustment until the following year, the first adjustment must include all tax periods since you started to use the scheme and for all later adjustments you must only include tax periods since your last adjustment.
4.4 How to complete your return
Your output tax figure is used to complete box 1 of your VAT Return (form VAT 100). If you are using more than one scheme you must add together the output tax calculated from each scheme as well as any other amounts of output tax which are due, and put the total in box 1.
To help you fill in and submit your VAT Return read Notice 700/12.
5. Mechanics of Apportionment Scheme 2
5.1 Calculating VAT under Apportionment Scheme 2
The scheme works by applying the appropriate VAT fraction to your total of positive-rated DGT to establish the amount of tax that is due on your eligible retail sales. This gives you your scheme output tax. Section 6 explains the DGT rules in detail.
The VAT fraction is simply a way of calculating the amount of VAT contained in the total gross takings. VAT Notice 700 tells you more about the VAT fraction.
5.2 Starting to use Apportionment Scheme 2
Paragraph 5.2 has the force of law.
When you first start to use the scheme you must:
- calculate the ESP of the goods in stock at each rate of tax
- use the rolling calculation as described in paragraph 5.3
5.3 ESP calculations for Scheme 2
Paragraph 5.3 has the force of law (sub paragraphs are separately marked).
For each period you must calculate the total ESP of all goods you purchase for resale at each rate of tax.
You must:
- always be consistent in the method you use (both within a period and from one period to another)
- record any adjustments and keep the working papers with your retail scheme calculations
- make adjustments to the ESP at the end of each tax period to take account of factors which might affect the actual selling price
5.3.1 How to calculate ESP for Scheme 2
HMRC does not prescribe any particular method of calculating your ESP. But, as the calculation of your ESP has a direct effect on the tax you pay under the scheme, you must calculate them as realistically and accurately as possible.
You will need to keep the calculation under review to reflect factors which prevent you from achieving the ESP for any items.
5.3.2 What you must not include in your ESP calculations for Apportionment Scheme 2
Paragraph 5.3.2 has the force of law.
You must not include in your calculation the ESP of:
- goods bought for wholesale sales
- goods bought for private use
- disposals of stock resulting from a sale of all or part of the business
5.3.3 ESP adjustment
As ESP will rarely be fully achieved in your retail scheme, you must make adjustments at the end of each tax period to take account of factors which might affect the actual selling price.
Examples of factors that might need an adjustment:
- price changes, increases and decreases, for example, sell by date reductions
- special offers and promotion schemes
- wastage
- freezer breakdowns
- breakages
- shrinkage, pilferage and loss of stock
- bad debts that have been written off in the period
The list is not exhaustive. If you’re aware of other factors which affect your ESP, you must make the appropriate adjustments.
How you make these adjustments is up to you but you must always be consistent in the method you use (both within a period and from one period to another).
You must also record any adjustments and keep the working papers with your retail scheme calculations.
5.3.4 Difficulties making ESP adjustments for Apportionment Scheme 2
If you have difficulty in making these adjustments, you may need to use another scheme. But HMRC may agree either:
- a method of sampling where reductions cannot be established accurately
- to the omission of certain adjustments where the effect does not distort your retail scheme
5.4 Step-by-step Scheme 2 calculations
The following is a step-by-step guide to how you must calculate your VAT using this scheme.
5.4.1 ESP of your opening stock
If possible, you should carry out physical stock taking. Otherwise, you may use the ESP of the goods you received for retail sale in the 3 months before you started to use the scheme.
The following text and table has the force of law.
When you start to use the scheme, you must establish the ESP of your opening stock of goods for retail sale at each rate as follows:
| Step | Calculation | Amount |
|---|---|---|
| Step 1 | Work out the ESP, including VAT, of standard-rated goods for retail sale in stock. | £__ |
| Step 2 | Work out the ESP, including VAT, of reduced-rated goods for retail sale in stock. | £__ |
| Step 3 | Work out the ESP, including VAT, of all goods for retail sale in stock. | £__ |
5.4.2 Quarterly returns, output tax for your first 3 quarters
The following text and table has the force of law.
For each of your first 3 tax quarters, you must calculate your output tax for the period as follows:
| Step | Calculation | Amount |
|---|---|---|
| Step 1 | Add up your DGT for this tax period only | £___ |
| Step 2 | Add up the fully adjusted ESP, including VAT, of the standard-rated goods: received, made or grown for retail sale since you started to use the scheme, plus your standard-rated stock figure at 5.4.1, Step 1 | £___ |
| Step 3 | Add up the fully adjusted ESP, including VAT, of reduced-rated goods: received, made or grown for retail sale since you started to use the scheme, plus your reduced-rated stock figure at 5.4.1, Step 2. | £___ |
| Step 4 | Add up the fully adjusted ESP, including VAT, of all goods - standard, reduced and zero-rated: received, made or grown for retail sale since you started the scheme, plus your total stock figure at 5.4.1 Step 3. | £___ |
| Step 5 | (Total at step 2 ÷ total at step 4) × total at step 1 × 1/6 (VAT at 20%) | £___ |
| Step 6 | (Total at step 3 ÷ total at step 4) × total at step 1 × 1/21 (VAT at 5%) | £___ |
| Step 7 | Total at step 5 + total at step 6. This is your output tax for Apportionment Scheme 2 | £___ |
5.4.3 Quarterly returns, output tax for your fourth and subsequent quarters
Paragraph 5.4.3 has the force of law.
The ESP of the opening stock are now ignored from this stage onward.
For the fourth quarter and all subsequent quarterly periods, you must calculate your output tax for the period as follows:
| Step | Calculation | Amount |
|---|---|---|
| Step 1 | Add up the DGT for this tax period | £___ |
| Step 2 | Add up the ESP, including VAT, of standard-rated goods: received, made or grown for resale, in this period and the 3 previous tax periods | £__ |
| Step 3 | Add up the ESP, including VAT, of reduced-rated goods: received, made or grown for resale in this period and the 3 previous tax periods | £__ |
| Step 4 | Add up the ESP, including VAT, of all goods, standard, reduced and zero-rated: received, made or grown for resale in this period and the 3 previous tax periods | £__ |
| Step 5 | (Total at step 2 ÷ total at step 4) × total at step 1 × 1/6 (VAT at 20%) | £__ |
| Step 6 | (Total at step 3 ÷ total at step 4) × total at step 1 × 1/21 (VAT at 5%) | £__ |
| Step 7 | Total at step 5 + total at step 6. This is your output tax for Apportionment Scheme 2 | £__ |
5.4.4 Monthly returns, output tax for your first 11 periods
Paragraph 5.4.4 has the force of law.
Use the method at paragraph 5.4.2 for working out your output tax for the first 11 monthly returns instead of the first 3 quarters.
5.4.5 Monthly returns, output tax for your twelfth and subsequent periods
Paragraph 5.4.5 has the force of law.
Use the method at paragraph 5.4.3 for working out your output tax for the twelfth and subsequent monthly returns instead of the fourth and subsequent quarters.
5.5 How to complete your VAT Return
Your output tax figure is used to complete box 1 of your VAT Return (form VAT100). If you’re using more than one scheme, you must add together the output tax calculated by each scheme as well as any other amounts of output tax due and put the total in box 1.
To help you fill in and submit your VAT Return read Notice 700/12.
6. DGT checklist
6.1 What must be included in your DGT
Your DGT record includes:
- all cash payments as they are received by you or on your behalf from cash customers for your retail supplies
- the full value, including VAT, of all your credit or other non-cash retail sales at the time you make the supply
- details of any adjustments made to these figures
The following paragraph has the force of law.
The DGT record is a record of all your retail supplies and is a crucial part of your retail scheme records. It is this figure and not simply cash on hand which you must use when calculating output tax due under your retail scheme.
6.2 Recording your DGT
You should include all forms of cash payment in your DGT as they’re received from customers. Examples of cash payments are:
- cash
- cheques
- payments by debit or credit card
- electronic cash payments
- the face value of gift, book and other vouchers redeemed (subject to paragraph 8.3)
- any other payments for retail sales
- the value of any payment in kind for retail sales
6.3 Adjusting your DGT
The first 2 paragraphs have the force of law.
You must retain evidence to support any adjustments to your DGT figure. If you make an adjustment but subsequently receive a payment, you must include that payment in your DGT for the date received.
You must not reduce your DGT for till shortages which result from theft of cash, fraudulent refunds and voids or poor cash handling by staff. See paragraph 7.13 for further details.
But you may reduce your DGT for the following:
- counterfeit notes
- illegible credit card transactions (where a customer’s account details are not legible on the credit card voucher and therefore cannot be presented or redeemed at the bank)
- unsigned or dishonoured cheques from cash customers (but not from credit customers)
- chargebacks
- inadvertent acceptance of out of date coupons or vouchers which have previously been included in your DGT but which are not honoured by promoters
- receipts recorded for exempt supplies
- receipts recorded for supplies which are to be accounted for outside the scheme
- refunds to customers for overcharges, returned or faulty or unsuitable goods
- float discrepancies
- till adjustments, for example, correcting mechanical faults, staff training and voids (where a mistake has been made and corrected at the time of error)
- adjustments referred to in paragraphs 7.2.2, 7.3, 7. 4 and 7.6
6.4 Foreign currency
If you accept foreign currency then this should be included in your DGT at the Sterling equivalent value. Section 7 of Notice 700 sets out how to do this and has the force of law.
Foreign currency inadvertently accepted does not need to be accounted for in the DGT, provided that it is of minimal value and not exchanged for Sterling.
6.5 Transactions not covered in this section
If you have a particular type of transaction which is not covered in this section, you may find further help in section 7.
There’s also advice on the treatment of business promotions in section 8.
7. Special transactions
If you have a particular type of transaction which is not covered in this section, you should contact VAT general enquiries for advice.
7.1 Acquisitions into Northern Ireland from EU member states
This paragraph only applies to Northern Ireland.
Notice 725 explains how to account for VAT on goods purchased (acquisitions) from EU member states.
Suppliers from the EU will not charge VAT on their sales to you but you will have to account for VAT at the rate applicable to the goods in the UK.
For retail scheme purposes, references in this notice to zero-rated goods apply only to goods which are zero-rated in the UK. Goods which you acquire from EU member states at the zero rate but which are liable to reduced or standard-rated in the UK, should be treated as such in your retail scheme calculations.
7.2 Retail sales in Northern Ireland to persons residing in EU member states
This paragraph only applies to Northern Ireland.
7.2.1 Supplies to visitors from the EU
Unlike non-EU visitors (see paragraph 7.3.1) there is no VAT relief available for EU visitors. Sales to EU visitors are treated in exactly the same way as sales to UK customers.
7.2.2 Supplies to consumers in EU member states (distance selling)
These are supplies which you arrange to be delivered to your EU customer in an EU member state. Unless you are or have a liability to be registered in that other member state (see section 6 of Notice 725 and section 6 of Notice 700/1), you should charge UK VAT as normal.
Where you’re registered elsewhere in an EU member state for distance selling then these sales are outside the scope of UK VAT and should be excluded from your UK VAT account.
7.3 Exports to countries outside the EU
7.3.1 Retail Export Scheme
This is for retailers selling goods for export from Northern Ireland and the EU by eligible visitors who make the purchase in person. This scheme is not available for retailers in Great Britain.
The rest of paragraph 7.3.1 has the force of law.
If you make supplies under the terms of the Retail Export Scheme as described in Notice 704, you should account for tax as follows:
(a) Include in your DGT all amounts, including VAT, for goods sold for retail export. Do not deduct the refunds which you expect to make to customers.
(b) At the end of each tax period, add up the VAT amounts for reduced and standard-rated goods which have actually been exported and where VAT has been repaid. This will be the total of the amounts shown on the officially certified forms returned to you during the period. Do not adjust for any administration charge you have or expect to make to customers.
(c) Adjust the tax at (b) in your VAT account.
7.3.2 Direct Refund Scheme
Paragraph 7.3.2 has the force of law.
Sales under the ‘Direct reclaim system’ (paragraph 5.7 of Notice 704) should be treated as a normal accounting sale to the refund company.
7.3.3 Administrative charges
Paragraph 7.3.3 has the force of law.
If you make administrative charges or use a refund company to administer the refund on your behalf, you still have to account for the VAT on the principal supply as explained in paragraphs 5.1 and 5.2 of Notice 704.
Any charges you make should be accounted for as an adjustment to the VAT account and not as a netting off against the refund.
7.3.4 Direct and indirect exports
If you as a retailer, export goods direct or supply goods in the UK to overseas traders for subsequent indirect export by them as described in Notice 703, you should account for these goods as an adjustment to your VAT account.
You will also need to adjust your ESP.
7.4 Exempt supplies
Any payments received for supplies which are exempt from VAT must be excluded from your scheme calculations.
If you make exempt supplies, you will need to consider the rules on partial exemption explained in Notice 706 and Notice 706/2.
7.5 Goods bought at one rate and sold at another
For some goods the rate of tax you charge depends on how they’re offered for sale. For example, meat is zero-rated when sold for human consumption but the same meat becomes standard-rated when sold as pet food.
As the retailer, you are responsible for ensuring that the correct liability for VAT is applied when you sell goods.
The rest of paragraph 7.5 has the force of law.
All other goods you buy at one rate of tax and sell at another should be treated as follows:
If you keep separate stocks of the goods that you put up or hold out for sale at the different tax rates, when they are received you must enter them in your record of goods received for resale at the tax rate that will apply when they are sold.
If you hold a common stock of those goods that you draw on to sell at different tax rates, depending on the scheme you are using, you must enter them in your scheme records at the tax rate that applied when you received them. But, when they are put up or held out for sale at the other tax rate, you must:
(a) deduct the appropriate amounts from your scheme records at the tax rate that applied when you received the goods
(b) enter the corresponding amounts in your scheme records at the tax rate that applies when you sell them.
7.6 Goods sold on ‘sale or return’, ‘approval’ or similar terms
You should keep a separate record of goods supplied on a ‘sale or return’ or ‘approval’ basis. You should only account for these when the customer has adopted the goods.
If the customer pays a deposit see paragraph 7.8.
7.7 Credit transactions
The first paragraph has the force of law.
You must account for output tax on credit retail supplies by including the full value of the goods in your DGT at the time you make the supply. Do not wait until you are paid and do not include the instalments in the DGT when they are received.
Additional rules apply depending on the way the credit sales are financed. You should read paragraph 8.4 of Notice 700 which sets out the most common scenarios for supplies on credit and the use of finance companies and the direction of the supplies.
7.7.1 Supplies involving a finance company
If you arrange credit for your customer through a finance company, you should include the full amount paid for the goods by the customer in your DGT at the time you make the supply.
7.7.2 Self-financed credit supplies
If you make a separate charge for credit (additional to the cash price) and you disclose it to the customer, this is exempt from VAT and should be excluded from your DGT.
If your turnover is less than £1 million and you run a business where your customers do not pay for the goods when they receive them (for example, you may be a milkman or newsagent), you may take account of opening and closing debtors in your scheme calculations.
Paragraph 4.5 of Notice 727 gives an example of how to do this.
7.8 Deposits
Most deposits are an advance payment for a supply and must be included in your DGT. But if you take a deposit for another reason, for example, as security to ensure the safe return of goods, you should exclude this amount from your DGT (regardless of whether it is eventually refunded or forfeited).
7.9 Refunds
If you refund some or all of the payment made by the customer, you may deduct the amount which was refunded or credited to customers from your DGT, to a maximum of the amount originally charged.
7.10 Delivery charges
7.10.1 Single supply of delivered goods
Under the normal rules, if, in order to fulfil your contract for the sale of the goods, you also deliver them, there is a single supply of delivered goods unless the goods are supplied on approval. It does not matter whether the charge you make for delivery is separately itemised or invoiced.
Examples of supplies of delivered goods are doorstep deliveries of milk or newspapers. The liability of the delivery charge follows the liability of the goods. In such a case, you should include the full amount charged in your DGT.
7.10.2 Goods on approval
If you supply goods on approval terms, there is no supply of the goods at the point of delivery. Any supply of the goods that does take place will be at the point at which the goods are subsequently adopted by the customer.
In such cases, the delivery service provided does not form part of a single supply of delivered goods but is a separate standard-rated supply, that is the supply of delivery of the goods to enable the customer to inspect them prior to making a decision as to whether or not to purchase them. In such a case, you should account for any VAT as an adjustment to your VAT account.
7.10.3 Separate supply of delivered goods
If you supply goods under a contract that does not require delivery but where, nevertheless, you agree to deliver the goods and make a separate charge, then that charge is normally for a standard-rated supply of delivery services and you should account for any VAT as an adjustment to your VAT account.
7.11 Vouchers
Sections 8 and 9 of Notice 700/7 explain vouchers in more detail.
Section 8 of this notice explains how to account for vouchers on redemption.
7.11.1 Single-purpose vouchers
These must be accounted for in your DGT when they are sold. Vouchers that are given away may give rise to a deemed supply of the goods or services and an adjustment made outside of the retail scheme.
Vouchers issued before 1 January 2019
| Details | Accounting procedures |
|---|---|
| Single purpose voucher | Any VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain the reward goods or services from you. If you subsequently receive payment for the voucher from the issuer, this is the consideration for the supply and should be accounted for as an adjustment to your VAT account. |
Vouchers issued on or after 1 January 2019
| Details | Accounting procedures |
|---|---|
| Single purpose voucher | Any VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain the goods or services from you. However, where the redeemer and issuer of the voucher are different persons there is a supply of the goods or services to the issuer, which needs to be accounted for by the redeemer in accordance with paragraph 2.5 of this notice. |
7.11.2 Multi purpose vouchers
Multi purpose vouchers should be accounted for in accordance with the table below.
| If you | then |
|---|---|
| sell gift vouchers at a value higher than their face value | the excess is consideration for a supply of services and VAT should be accounted for outside the retail scheme. |
| sell gift vouchers at their face value | do not include the amount in your DGT. |
| sell gift vouchers at a price lower than their face value | do not include the amount in your DGT. |
| include gift vouchers with other products for a single charge | if the customer has no choice but to accept the voucher when the products are supplied VAT is due on the full price of the products. The voucher is considered to be supplied for free. |
| issue gift vouchers free of charge | no VAT is due on the issue. |
| have purchased a third party’s gift vouchers which you intend to issue free of charge (for example in your own promotion) | you will not normally have been charged VAT. Equally, you do not have to account for any VAT when you give them away. |
7.12 Sale of discount vouchers or cards
If you sell discount vouchers or cards entitling the holder to discounts on purchases from you (commonly referred to as ‘money-off coupons’), you must include the payment received in your DGT.
For example if the voucher or card can only be used for purchases of zero-rated goods, you should add the payments received for the voucher or card to your zero-rated DGT.
If you sell discount vouchers or cards entitling the holder to discounts at several traders, this is a standard-rated supply and must be dealt with outside your scheme.
7.13 Theft, shrinkage, leakage and stock losses
If you find that there are unexplained accounting discrepancies between stock and sales, you must consider the extent to which this is attributable to unrecorded sales, such as to the theft of cash by staff, and add the value back to your DGT.
Where possible, these adjustments should be allocated to the specific VAT period in which the theft took place.
Otherwise, such shrinkage should be apportioned across relevant tax periods on a fair and reasonable basis.
Unless you have evidence of the liability of the unaccounted supplies, adjustments must be in line with the usual proportion of standard against zero-rated supplies.
When you do this exercise, you will need to consider whether the shrinkage, for which you have adjusted your DGT, requires you to further adjust your ESP to correct any significant distortion of the calculation.
Losses due to shoplifting or damage do not affect your DGT records as no supply will have been made.
7.14 Disposal of business assets
If you dispose of a business asset, such as a cash register or a van, you should account for VAT as an adjustment to your VAT account.
7.15 Private or personal use of goods
Under the normal rules, tax is due (at cost price) on any positive-rated goods purchased for resale which you then take out of your business for private or personal use (see Notice 700), and you should adjust your VAT account accordingly.
You must also make an appropriate adjustment for the cost of the goods from the ESP calculations.
7.16 Part-exchange
When you accept goods or services in part-exchange for a supply, you should include in your DGT the full selling price, including VAT, of the goods you supplied.
If you resell goods you have accepted in part-exchange you may be able to use the Secondhand Margin Scheme (see paragraph 7.17).
If you are unable to use that scheme, you should include the resale of the part exchange goods in your retail scheme.
7.17 Secondhand goods
You may be able to use the special scheme for secondhand goods see Notice 718 for secondhand goods, works of art, antiques and collectors’ items. These should be accounted for as an adjustment to your VAT account.
If the scheme is not used, then sales of secondhand goods should be accounted for within your retail scheme in the same way as new goods.
7.18 Sale or assignment of debts
If you sell or assign debts due from your customers, no adjustment to your VAT account is necessary since you will already have included the correct amount when you made the supply.
7.19 Sales where you act as an agent for a third party
Normally you will be paid a commission which should be accounted for as an adjustment to your VAT account. Payments you receive and pass on to the third party do not form part of your DGT.
7.20 Amusement and gaming machines
If you are using either of the apportionment schemes, you should exclude the takings from the machines from your DGT. VAT should be accounted for as an adjustment to your VAT account.
For details of how to work out the taxable take, see Notice 701/29.
7.21 Catering
Section 7 of Notice 727, which has the force of law, sets out how caterers should account for VAT.
7.22 Retail chemists
Section 8 of Notice 727, which has the force of law, sets out how chemists’ should account for VAT.
7.23 Florists
If you are a member of an organisation such as Interflora and Teleflorist, see section 9 of Notice 727, which has the force of law, sets out how florists should account for VAT.
7.24 Goods bought from unregistered suppliers
Paragraph 7.24 has the force of law.
If you buy goods for retail sale from suppliers who are not registered for VAT, you must include these goods in your scheme calculation at the rate normally applicable to those goods.
7.25 Recall of goods by manufacturers
Paragraph 7.25 has the force of law.
If a manufacturer recalls contaminated or otherwise faulty goods you must adjust your:
- purchase records if you use Apportionment Scheme 1
- ESP records if you use Apportionment Scheme 2
8. Business promotions
The general guidelines on the VAT treatment of business promotion schemes covered in this section are given in Notice 700/7.
This guidance tells you how to account for VAT on the most common forms of business promotion. If you wish to operate a particular promotion scheme which is not covered below you should contact VAT general enquiries.
8.1 Business entertainment or gifts
If you purchase goods or you use goods from your normal stock for business entertainment, you should read Notice 700/65.
If you give stock away as gifts, you should read Notice 700/7.
Subject to the rules set out in these notices, you must account for any tax due by adjusting your VAT account by the value at cost.
8.2 Voucher redemptions
8.2.1 Discount vouchers
These are also known as money-off coupons, see section 7 of Notice 700/7 for further details.
| Details | Accounting procedures |
|---|---|
| As part payment | See paragraph 7.3 of Notice 700/7 for information about the redemption of coupons. |
| Handling charges | If you make a further charge to a manufacturer for handling the vouchers after redemption, this is payment for a supply which is exempt from VAT and should not be included in your DGT. Other charges, for example, relating to running the promotion should be accounted for as an adjustment to your VAT account. |
| Sale | If you sell discount vouchers. See paragraph 7.12 of this notice. |
8.2.2 Vouchers
See sections 8 and 9 of Notice 700/7 for more information.
| Details | Accounting procedures |
|---|---|
| Single purpose voucher | Any VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain the goods or services from you. If you subsequently receive payment for the voucher from the issuer, this is the consideration for the supply and should be accounted for as an adjustment to your VAT account. |
| Credit voucher | No VAT was due upon issue. When the voucher is redeemed, it should be entered into the DGT at its face value. If you subsequently receive payment for the voucher from the issuer, there is nothing further to account for. Any fee charged by the issuer should be treated as a cost to the business. |
| Retailer voucher | No VAT was due upon issue. When the voucher is redeemed, it should be entered into the DGT at the value it was initially sold for. |
| Other vouchers | No VAT was due upon issue. When the voucher is redeemed, it should be entered into the DGT at its face value. If you subsequently receive payment for the voucher from the issuer, there is nothing further to account for. Any fee charged by the issuer should be treated as a cost to the business. |
Vouchers issued on or after 1 January 2019
| Details | Accounting procedures |
|---|---|
| Single purpose voucher | Any VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain goods or services from you. However, where the redeemer and issuer of the voucher are different persons there is a supply of the goods or services to the issuer, which needs to be accounted for by the redeemer in accordance with paragraph 2.5 of this notice. |
| Multi purpose voucher | No VAT was due upon issue. When the voucher is redeemed, it should be entered into the DGT at its face value, or value of the consideration paid at the last transfer where known. If you subsequently receive payment for the voucher from the issuer, there is nothing further to account for. Any fee charged by the issuer should be treated as a cost to the business. |
8.2.3 Vouchers given away
This is a general guide to treatment, the actual treatment will depend on the circumstances and the terms and conditions of the issue of the vouchers.
| Details | Accounting procedures |
|---|---|
| Single purpose vouchers issued by you to customers making a specific purchase or purchases | No VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain the reward goods. However, you may need to adjust the scheme calculations to reflect the fact that the consideration is in respect of the primary and reward goods. You may need to adjust the ESP of the goods concerned under Apportionment Scheme 2. |
| Single purpose vouchers issued freely by you | See paragraph 7.11. |
| Multi purpose vouchers issued freely by you | No VAT is due upon issue. When the voucher is redeemed for goods or services the normal multi purpose voucher valuation rules will apply. See section 9.5 of Notice 700/7. You may need to adjust the ESP of the goods concerned under Apportionment Scheme 2. |
| Vouchers issued by another person but redeemable with you | They are likely to be subject to the terms and conditions of that person’s promotion. For example, you may be given certain stocks to give away on behalf of that person. These stocks must not be included in your retail scheme calculations. Business promotions (VAT Notice 700/7) contains further information. Alternatively, contact VAT general enquiries. |
8.3 Vouchers redeemed for cash with you
If you redeem vouchers for cash, the cash payment is outside the scope of VAT. You must not alter your DGT by the cash paid out.
8.4 Goods linked in a promotion
It is necessary to distinguish between business promotions where the supplier or sponsor contributes in whole or in part to the cost of the promotion, and those which are wholly sponsored by the retailer. This affects both how you treat your DGT and how you carry out the rest of the calculation.
Third party sponsorship payments for a promotion must be included in the DGT.
8.4.1 Types of promotion
Main types of promotions are 2 different articles which are sold for a single price in a combined offer, for example a:
- washing machine with an iron
- jar of coffee with a packet of chocolate biscuits
A number of the same articles are sold in a multi-buy offer, for example buy:
- 2 and get another free
- a sandwich and get a free can of drink
8.4.2 Apportionment Scheme 1 treatment
As the DGT is apportioned according to the liability of the goods when purchased there are no additional rules to follow.
8.4.3 Apportionment Scheme 2 treatment
The following 2 paragraphs including the bullet points have the force of law.
You will need to adjust your ESP if the contribution is for the class of goods which you have marked up in your retail scheme.
If you receive from the supplier or sponsor either:
- a full contribution, do not adjust your ESP
- a partial contribution, adjust your ESP for the appropriate goods to the extent of the amount not supported by the sponsor or manufacturer
- no contribution, make an appropriate adjustment to the ESP of the promotion goods
If both articles are liable at the same rate of tax you must adjust your ESP accordingly.
If the articles are liable at different rates of tax then you must apportion the payment received for them and adjust your ESP accordingly. You may use the method explained in Notice 700, or in the case of goods linked by the manufacturer, you may treat the articles in accordance with the information shown on the supplier’s invoice (for example, if the invoice shows separate prices and amounts of tax, you may apportion your selling price on the same basis).
8.4.4 Accounting for third party payments
When you receive a contribution from a manufacturer or joint sponsor representing partial payment for goods supplied to a customer, you should account for this in the period the goods are supplied.
But as a concession, you may account for such contributions in the period they are received from the manufacturer or joint sponsor.
If a manufacturer or joint sponsor contributes, for example, towards advertising, you have made a separate supply of services and this must be dealt with outside your retail scheme.
8.4.5 Liability
A retail scheme cannot alter the VAT liability of the elements to a linked supply, it just provides a mechanism for calculating the VAT due. Any changes to the liability must be agreed outside of the scheme.
For example, as a concession, where the minor article satisfies the criteria set out in Notice 700/7, you may account for VAT on the minor item at the same rate as the main article.
9. Appeals
9.1 Disagreeing with a decision made by HMRC
If you disagree with a decision made by us, you can ask for it to be reconsidered.
9.2 If you are still not satisfied
You can also appeal to an independent VAT and Duties Tribunal if you are still not satisfied.
You will find out more about the appeal procedure in Disagree with a tax decision.
Your rights and obligations
Read Your Charter to find out what you can expect from HMRC and what we expect from you.
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Updates to this page
Last updated 31 December 2020 + show all updates
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This page has been updated because the Brexit transition period has ended.
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Guidance at paragraphs 7.11 and 8.2 have been updated about changes in the treatment of vouchers.
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First published.