Retail Schemes
Tertiary legislation about Retail Schemes, including Point of Sale, the Apportionment Scheme and the Direct Calculation Scheme.
The following has force of law under Paragraph 2(6) of Schedule 11 of Value Added Tax Act 1994 and Regulations 66-75 of The VAT Regulations 1995 (1995/2518) and was originally published within VAT Notice 727
1. Special rules about the standard schemes — Recording your DGT
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.
2. Changes of tax rate or liability
2.1 Definition of a change of VAT rate
For the purposes of this notice and the associated ‘How to work’ notices, a change in VAT rate means that a rate of VAT has been changed or a new rate has been introduced.
2.2 Accounting for VAT under your chosen scheme if the rate of VAT changes
If the change of rate falls part way through an accounting period, you will have to make 2 calculations: one for the old VAT rate and one for the new rate.
This will cover supplies made before and after the rate change. You should add these amounts together to give you your tax liability for the period.
3. Catering adaptation
3.1 Why an adaptation for catering supplies is necessary
Catering sales must normally be accounted for using the Point of Sale VAT Retail Scheme(VAT Notice 727/3) to establish your VAT liability.
3.2 Conditions for using the catering adaptation
You may use the catering adaptation described in paragraphs 3.5 and 3.6 provided:
- you can satisfy us that you are unable to operate the Point of Sale Scheme
- you have reasonable grounds for believing that the tax-exclusive value of your taxable retail catering sales (reduced, standard and zero-rated sales) will not exceed £1 million in the next 12 months
- your use of the catering adaptation produces a fair and reasonable result in any period
3.3 Starting to use the catering adaptation
If you wish to use the catering adaptation and meet the conditions detailed in paragraph 3.2 you must notify HMRC. Generally we will do no more than acknowledge your letter. You may begin to use the catering adaptation as soon as you receive our acknowledgement.
3.4 Maintaining records
To use the Catering Adaptation you must maintain a record of DGT in accordance with the main rules of the Point of Sale Scheme, some of which have force of law.
3.5 Calculating output tax under the catering adaptation
To calculate your output tax on catering sales, follow the procedure in the table below for each tax period.
| Step | Procedure | Result |
|---|---|---|
| 1 | Establish your DGT in accordance with the rules in the relevant scheme notice. | £ ___ |
| 2 | Calculate the percentage of your total catering sales made at the standard rate. See the rules covering the making of the calculation in paragraph 3.6. | = % |
| 3 | Calculate the percentage of your total catering sales made at the reduced rate. See the rules covering the making of the calculation in paragraph 3.6 | = % |
| 4 | Apply the percentage at Step 2 to the DGT at Step 1. | £ ___ |
| 5 | Apply the percentage at Step 3 to the DGT at Step 1. | £ ___ |
| 6 | Total at Step 4 × Standard Rate VAT fraction. (1/6 for VAT at 20%.) | £ ___ |
| 7 | Total at Step 5 x Reduced Rate VAT fraction (1/21 at 5%) | £ ___ |
| 8 | Add together the total at step 6 and step 7 | £ ___ This is your output tax on catering sales for this period |
3.6 Calculating the percentage of standard-rated sales
Your method of calculation must be able to satisfy us when we visit that the Catering Adaptation gives a fair and reasonable result in any period. Whichever way you choose to do your calculation you must always:
- base the calculation on a sample of your actual sales for a representative period, the representative period will depend on the nature of your business but you must be able to satisfy us that it takes account of hourly, daily and seasonal fluctuations
- retain details of the sample, including the dates and times it took place
- carry out a new calculation in each tax period
You must not use a calculation that has been established by a previous owner of the business.
4. Retail chemist adjustment
4.1 How retail chemist adjustment applies to other retail schemes
If you’re using a Point of Sale Scheme you will be accounting for VAT at the correct rate. This is because you identify the correct rate of VAT at the time the supply is made and no adjustment is necessary.
The Retail Chemist Adjustment cannot be used with Apportionment Scheme 2.
4.2 How the retail chemist adjustment works if you use the direct calculation schemes or apportionment scheme 1
Whether you are using Direct Calculation Scheme 1 or 2 or Apportionment Scheme 1 you must make the following adjustment:
| Step | Procedure | Result |
|---|---|---|
| 1 | Calculate your DGT including the total amount from your prescription charges and NHS cheque (less the value of any exempt supplies). | £ ___ |
| 2 | Work out the output tax as explained in the Direct Calculation schemes notice or Apportionment schemes notice. | £ ___ |
| 3 | Add up the payments received in the period for all Group 12 goods, even if you did not supply the goods in the period. Your NHS cheque may include payments for supplies not zero-rated under Group 12, but exempt or standard-rated. Such amounts must not be included in this total. | £ ___ |
| 4 | Estimate the value of goods included in step 3 that were zero-rated when you received them (see paragraph 8.5 of Notice 727). | £ ___ |
| 5 | Estimate the value of goods included in step 3 that were charged at the reduced rate when you received them (see paragraph 8.6 of Notice 727) | £ ___ |
| 6 | Add the totals at step 4 and step 5 | £ ___ |
| 7 | Subtract the total at step 6 from the total at step 3. | £ ___ |
| 8 | To work out the VAT you will have included in step 2 from Group 12 goods, which were standard rated when you received them, multiply the total at step 7 by the VAT fraction (1/6 for VAT at 20%). | £ ___ |
| 9 | To work out the VAT you will have included in step 2 from Group 12 goods, which were charged at the reduced rate when you received them, multiply the total at step 5 by the VAT fraction (1/21 for VAT at 5%). | £ ___ |
| 10 | To work out the total VAT you will have included in step 2 from Group 12 goods add the totals at step 8 and step 9 | £ ___ |
| 11 | The output tax is the total at step 2 minus the notional output tax at step 10. | £ ___ |
4.3 Estimating the percentage of zero-rated supplies
Whichever way you choose to make your estimation you must always:
- base the estimation on a sample of your actual purchases for a representative period, the representative period will depend on the nature of your business but you must take account of seasonal fluctuations
- retain details of the sample
- carry out a new estimation in each tax period, you must not use an estimation that has been established by a previous owner of the business
4.4 Estimating the percentage of reduced rated supplies
Whichever way you choose to make your estimation you must always:
- base the estimation on a sample of your actual purchases for a representative period, the representative period will depend on the nature of your business but you must take account of seasonal fluctuations
- retain details of the sample
- carry out a new estimation in each tax period, you must not use an estimation that has been established by a previous owner of the business
4.5 Annual adjustment when using direct calculation scheme 2
In addition to the period by period scheme adaptation, those using Direct Calculation Scheme 2 are also required to undertake an annual adjustment.
The method(s) to apply regarding the standard annual adjustment are set out at paragraph 4.5 of Notice 727/5 paragraph 4.5 of Notice 727/5 . This includes the need to make adjustments to ESP. In the case of retail chemists, adjustments to reflect Group 12 supplies should also be incorporated in the overall annual adjustment. This should be done as follows:
a) complete steps 1 to 18 of the standard method described at paragraph 4.5.1 of Notice 727/5.
b) extract the DGT and output tax figures from steps 2 and 18.
c) transfer these to steps 1 and 2 (respectively) of an annual Retail Chemist Adjustment schedule - based on the format at paragraph 5.
d) add together the figures from each of the quarterly schedules (paragraph 5) to produce annual totals for steps 3, 4 and 5.
e) transfer the figures from (d) to the relevant spaces on the annual schedule mentioned at (c).
f) follow steps 6 to 11 on the schedule (mentioned at (c)) to produce an annual total of output tax payable on retail scheme supplies (step 11), which reflects stock level variations, this equates to an ESP or stock adjusted figure at step 18 in the standard method (see (b) above).
g) add the figures at step 11 of the quarterly schedules (paragraph 5) to produce an annual total of tax payable on retail scheme supplies before any stock adjustment, this equates to step 19 in the standard method (see (b) above).
h) if the figure at step (f) is greater than the figure at step (g), you have paid too little tax and you should add the difference to your output tax in the fourth quarter, this sub-paragraph and that at (i) reflects the position at step 20 of paragraph 4.5.1 Notice 727/5.
i) if the figure at step (f) is smaller than the figure at step (g), you have paid too much tax and you should deduct the difference from your output tax in the fourth quarter.
5. Special arrangements for florists — How the adjustment works
Depending on the scheme you use, you must follow the rules in this table:
| Scheme type | As sending member you must | As executing member you must |
|---|---|---|
| Point of Sale | include the payments received in your DGT when you take the order. (No adjustment is necessary.) | not include payments received from the agency in your DGT account for any tax due outside your retail scheme |
| Apportionment 1 and 2 | identify from agency documentation the value of the sales you make as a sending member and account for any tax due outside your retail scheme not include the payments for these sales in your DGT under the retail scheme calculation |
account for any tax due outside your retail scheme on the basis of the agency documentation not include the agency payments in your DGT exclude the value of flowers from your purchase records if you use the simple scheme - Apportionment Scheme 1 adjust your ESP for the value of flowers sent as executing member and accounted for outside the retail scheme if you use Apportionment Scheme 2 |
| Direct Calculation 1 and 2 | identify from agency documentation the value of the sales you make as a sending member and account for any tax due on those amounts outside your retail scheme not include the payments for these sales in your DGT under the retail scheme calculation |
account for any tax due outside your retail scheme on the basis of the agency documentation not include agency payments in your DGT adjust your ESP for the value of flowers sent as executing member and accounted for outside the retail scheme |
The following has force of law under Paragraph 2(6) of Schedule 11 of Value Added Tax Act 1994 and Regulations 66-75 of The VAT Regulations 1995 (1995/2518) and is published within VAT Notice 727/3.
1. General rules
1.1 When you can change schemes
If you become ineligible to use a scheme, you must cease using the scheme from the end of the next complete accounting period.
1.2 Exceeding the scheme’s turnover limit
Businesses whose annual turnover from all retail sales exceeds £130 million cannot use any of the standard retail schemes including the Point of Sale Scheme. Instead, they can agree a bespoke retail scheme.
2. The Point of Sale Scheme
2.1 When you can use the Point of Sale Scheme
You can use the Point of Sale Scheme if you are a retailer making supplies at 2 or more VAT rates and you can identify the correct liability of the supplies at the time you make them.
But you must use the Point of Sale Scheme rather than any other retail scheme if you make supplies at only one positive rate (that is, all reduced-rated or all standard-rated).
2.2 Using other schemes with the Point of Sale Scheme
Provided you are eligible to use the schemes:
- you can mix the Point of Sale Scheme with either a direct calculation or an apportionment scheme
- 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
2.3 Keeping records
You must keep a record of:
- your sales daily gross take (DGT) by rate of VAT
- any adjustments you make to the totals
- any working papers you use to calculate your output tax
3. Mechanics of the Point of Sale Scheme — Step-by-step scheme calculations
The following table is a step-by-step guide to how you must calculate your VAT using this scheme. From the day you start to use the scheme keep a record of your DGT at each rate of VAT.
For each tax period make your scheme calculation as follows:
| Step | Description | Amount |
|---|---|---|
| 1 | Add up your DGT for standard-rated supplies for this tax period | £__ |
| 2 | Add up your DGT for lower-rated supplies for this tax period, if you have any | £__ |
| 3 | Multiply the total at step 1 by 1/6 (VAT at 20%) | £__ |
| 4 | Multiply the total at step 2 by 1/21 (VAT at 5%) | £__ |
| 5 | Add the totals at steps 3 and 4 to get the scheme output tax | £__ |
4. DGT checklist
4.1 What must be included in your DGT
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.
4.2 Adjusting your DGT
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 6.13 of VAT Notice 727/3 for further details.
4.3 Exports to countries outside the UK and EU
4.3.1 Retail Export Scheme
If you make supplies under the terms of the Retail Export Scheme (Northern Ireland), 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.
4.3.2 Direct Reclaim Scheme
Sales under the ‘Direct reclaim system’ should be treated as a normal accounting sale to the refund company. Read guidance on the Retail Export Scheme (Northern Ireland).
4.3.3 Administrative charges
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 guidance on the Retail Export Scheme (Northern Ireland). Any charges you make should be accounted for as an adjustment to the VAT account and not as a netting off against the refund.
4.4 Credit transactions
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.
5. Scheme treatment for Goods linked in business promotions
If an apportionment of the selling price is necessary, you must separate the amount allocated to the zero-rated article from your standard-rated takings before carrying out your scheme calculation.
The following has force of law under Paragraph 2(6) of Schedule 11 of Value Added Tax Act 1994 and Regulations 66-75 of The VAT Regulations 1995 (1995/2518) and was originally published within VAT Notice 727/4.
1. General rules
1.1 When you can change schemes
If you become ineligible to use a scheme you must cease using the scheme from the end of the next complete accounting period.
1.2 Exceeding the scheme’s turnover limit
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.
2. When to use the apportionment schemes
2.1 When to use the apportionment schemes
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.
2.2 Using other schemes with the apportionment schemes
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
2.3 Keeping records
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
2.4 If you exceed the Scheme 1 turnover limit
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.
2.5 Ceasing to use the scheme
2.5.1 Apportionment Scheme 1
When you cease to use Apportionment Scheme 1, you must perform a closing adjustment (see paragraph 3.2.2), even if you leave before your scheme’s first anniversary. This closing adjustment should be calculated using the same method as the annual adjustment.
2.5.2 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.
2.6 Other rules when stopping the schemes
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
3. Mechanics of Apportionment Scheme 1
3.1 Starting to use Apportionment Scheme 1
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.
3.2 Step-by-step scheme calculations
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.
3.2.1 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 | £__ |
3.2.2 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 | £__ |
3.2.3 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. Mechanics of Apportionment Scheme 2
4.1 Starting to use Apportionment Scheme 2
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 4.2
4.2 ESP calculations for Scheme 2
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
4.2.1 What you must not include in your ESP calculations for Apportionment Scheme 2
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
4.3 Step-by-step Scheme 2 calculations
4.3.1 Quarterly returns, output tax for your first 3 quarters
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 4.3.1, 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 4.3.1, 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 4.3.1 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 | £___ |
4.3.2 Quarterly returns, output tax for your fourth and subsequent quarters
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 | £__ |
4.3.3 Monthly returns, output tax for your first 11 periods
Use the method at paragraph 4.3.2 for working out your output tax for the first 11 monthly returns instead of the first 3 quarters.
4.3.4 Monthly returns, output tax for your twelfth and subsequent periods
Use the method at paragraph 4.3.3 for working out your output tax for the twelfth and subsequent monthly returns instead of the fourth and subsequent quarters.
5. DGT checklist
5.1 What must be included in your DGT
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.
5.2 Adjusting your DGT
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 of VAT Notice 727/4for further details.
6. Special transactions
6.1 Exports to countries outside the EU
6.1.1 Retail Export Scheme
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.
6.1.2 Direct Refund Scheme
Sales under the ‘Direct reclaim system’ in paragraph 5.7 of Notice 704 should be treated as a normal accounting sale to the refund company.
6.1.3 Administrative charges
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.
6.2 Goods bought at one rate and sold at another
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.
6.3 Credit transactions
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.
6.4 Goods bought from unregistered suppliers
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.
6.5 Recall of goods by manufacturers
7. Goods linked in a Business promotion — Apportionment Scheme 2 treatment
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
The following has force of law under Paragraph 2(6) of Schedule 11 of Value Added Tax Act 1994 and Regulations 66-75 of The VAT Regulations 1995 (1995/2518) and was originally published within VAT Notice 727/5
1. General rules
1.1 When you can change schemes
If you become ineligible to use a scheme, you must cease using the scheme from the end of the next complete accounting period.
1.2 Exceeding the scheme’s turnover limit
Businesses whose annual turnover from all retail sales exceeds £130 million cannot use any of the standard retail schemes including the direct calculation schemes. Instead, they can agree a bespoke retail scheme.
2. The Direct Calculation Schemes 1 and 2
2.1 When to use the direct calculation scheme
You can use a direct calculation scheme if you are a retailer making supplies at 2 or more VAT rates and you can identify the ESP of the purchases at the time you make them.
If you only supply goods at one rate (that is, all zero-rated, all reduced-rated or all standard-rated) you must use the Point of Sale VAT Retail Scheme.
You cannot use a direct calculation scheme for:
- zero-rated services if your minority sales are zero-rated
- standard-rated services if your minority sales are standard-rated
- supplies of catering
2.2 Using other schemes with the direct calculation schemes
Provided you are eligible to use the schemes:
- you can mix the Point of Sale VAT Retail Scheme with either of the direct calculation schemes
- you cannot use different versions of the direct calculation scheme at the same time and you must not mix a direct calculation scheme with an apportionment scheme
2.3 Keeping records
You must keep a record of:
- your sales (DGT)
- any adjustments you make to the totals
- the working papers you use to calculate your output tax
- a record of your ESP
2.4 If you exceed the Scheme 1 turnover limit
If your turnover is over £1 million, you must cease to use Direct Calculation Scheme 1 unless you expect your turnover to be below £1 million in the following 12 months and HMRC agrees to you remaining on Scheme 1.
2.5 Ceasing to use the scheme
2.5.1 Direct Calculation Scheme 1
If you cease to use Direct Calculation Scheme 1 no adjustment is required.
2.5.2 Direct Calculation Scheme 2
If you cease to use Direct Calculation Scheme 2 you must do a closing adjustment, as for the annual adjustment (paragraph 4.5), for the tax periods since your last adjustment.
2.6 Other rules when stopping the schemes
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
3. Mechanics of the Direct Calculation Schemes (1 and 2)
3.1 Starting to use the direct calculation schemes
Once you have started to set ESP for a class of goods, you must continue to set ESP for that class of goods for the whole of the retail scheme year.
3.1.1 Before you start to use the Direct Calculation Scheme 1
Retailers using Direct Calculation Scheme 1 must calculate the ESP for the class of goods chosen for the scheme. Retailers may mark up the minority goods or majority goods depending on which is more straightforward for them to do.
3.1.2 Before you start to use the Direct Calculation Scheme 2
Retailers using Direct Calculation Scheme 2 must calculate the ESP for the class of goods forming the smallest proportion minority goods of their supplies.
3.1.3 Direct calculation schemes opening stock
When you first start to use the scheme:
- for Direct Calculation Schemes 1 or 2, 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
- for Direct Calculation Scheme 2, you must know the ESP of the minority goods in stock, although you will not need to use this information until the annual adjustment is due
3.2 ESP calculations
For each period you must calculate the total ESP of all goods you purchase for resale for the class of goods chosen for the scheme. You must:
- always be consistent in the method you use (both within one 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
3.2.1 How to calculate ESP
You can only use method (b) if:
- you are unable to mark up each line, as in (a)
- the variation in mark up within the group is no more than 10%
- the mark up is reviewed each quarter
- the class of goods has a commercial basis and is not constructed artificially
You can only use method (c) if:
- you use the RRP as your selling price
- you’re able to record the RRP on receipt of the goods
- your invoices or other supplier documentation show the tax inclusive RRP of each separate line of goods, distinguish standard-rated, reduced-rated and zero-rated sales and show the total of goods at each rate of tax
3.3 Step-by-step Schemes 1 and 2 calculations
If you are using Direct Calculation Scheme 2 you must also make the adjustment described in paragraph 4.5 after you have calculated your output tax for the fourth quarter, and you must account for any difference on your return for that quarter.
3.3.1 Setting ESP for zero-rated goods
The following is a step-by-step guide to how you to calculate your VAT using Schemes 1 or 2 has the force of law.
If you set ESP for your zero-rated class of goods then you should make your scheme calculation as follows:
| Step | Description | Amount |
|---|---|---|
| 1 | Add up your DGT for this tax period (see section 5 - DGT checklist) | £___ |
| 2 | Add up the fully adjusted ESP of your zero-rated goods received, made or grown for retail sale in the tax period | £___ |
| 3 | (Total at step 1 less the total at step 2) × 1/6 (VAT at 20%) If you do not make supplies at the reduced rate of tax, this is your Scheme 1 or 2 output tax. If you make supplies at the reduced rate follow the additional steps below |
£___ |
| 4 | Add up the fully adjusted ESP of your reduced-rated goods received, made or grown for retail sale in the tax period | £___ |
| 5 | Multiply the figure at step 4 by 1/21 (VAT at 5%) | £___ |
| 6 | Multiply the total at step 4 by 1/6 (VAT at 20%) | £___ |
| 7 | Total at step 3 less (total at step 5 less the total at step 6) This is your Scheme 1 or 2 output tax |
£___ |
3.3.2 Setting ESP for standard-rated goods
If you set ESP for your standard-rated class of goods then you should make your scheme calculation as follows:
| Step | Description | Amount |
|---|---|---|
| 1 | Add up your DGT for this tax period (see section 5). Although this is not used in this calculation, it is still a requirement of operating the scheme and is also used in completing your VAT Return |
£___ |
| 2 | Add up the fully adjusted ESP of your standard-rated goods received, made or grown for retail sale in the tax period | £___ |
| 3 | Multiply the figure at step 2 by 1/6 (VAT at 20%) If you do not make supplies at the reduced rate of tax, this is your Scheme 1 or 2 output tax. If you make supplies at the reduced rate follow the additional steps below |
£___ |
| 4 | Add up the fully adjusted ESP of your reduced-rated goods received, made or grown for retail sale in the tax period | £___ |
| 5 | Multiply the figure at step 4 by 1/21 (VAT at 5%) | £___ |
| 6 | Total at step 5 + total at step 3 This is your Scheme 1 or 2 output tax |
£___ |
3.4 Annual adjustment (for Scheme 2 only)
Once you’ve calculated your output tax due under the retail scheme for the fourth quarter as in paragraph 3.3, you must carry out the annual adjustment as described below.
3.4.1 If you set ESP for zero-rated goods
The adjustment must take account of any disposals since the last adjustment which were not made by way of retail sale. You do this by excluding from the figures used in the calculation the value of any goods which were previously part of the scheme calculation, or included in the opening stock figure, but have not been sold by way of retail.
The adjustment is also required if a part of your business leaves the scheme.
| Step | Description | Amount |
|---|---|---|
| 1 | When you begin to use the scheme establish the fully adjusted ESP of your opening stock of zero-rated goods for retail sale | £___ |
| 2 | When you begin to use the scheme establish the fully adjusted ESP of your opening stock of reduced-rated goods for retail sale | £___ |
| 3 | Add up your DGT for the 4 quarters | £___ |
| 4 | Total the fully adjusted ESP of your zero-rated goods received, made or grown for retail sale in the four quarters, and add the opening zero-rated stock figure at step 1 | £___ |
| 5 | At the end of the scheme year, or when you cease to use the scheme, establish the fully adjusted ESP of your closing stock of zero-rated goods for retail sale (this becomes your opening zero-rated stock figure for the next year) | £___ |
| 6 | Deduct the figure at step 5 from the figure at step 4. This gives the fully adjusted ESP for the zero-rated goods you have sold by retail in the year | £___ |
| 7 | Total the fully adjusted ESP of your reduced-rated goods received, made or grown for retail sale in the four quarters, and add the opening reduced-rated stock figure at step 2 | £___ |
| 8 | At the end of the scheme year, or when you cease to use the scheme, establish the fully adjusted ESP of your closing stock of reduced-rated goods for retail sale (this becomes your opening reduced-rated stock for next year) | £___ |
| 9 | Deduct the figure at step 8 from the figure at step 7. This gives the ESP for the reduced-rated goods you have sold by retail in the year | £___ |
| 10 | Deduct the figure at steps 6 and 9 ( if applicable) from the figure at step 3. This gives you your standard-rated takings for the year | £___ |
| 11 | Multiply the figure at 10 by 1/6 (VAT at 20%) | £___ |
| 12 | Multiply the figure at step 9 by 1/21 (VAT at 5%) | £___ |
| 13 | Add together the figures at step 11 and step 12 (if applicable) to arrive at the output tax due under the retail scheme | £___ |
| 14 | Add up the output tax you have paid under the retail scheme in the 4 quarters | £___ |
| 15 | If the figure at step 13 is greater than the figure at step 14 you have paid too little tax and you should add the difference to your output tax in the fourth quarter. If the figure at step 13 is smaller than the figure at step 14 you have paid too much tax and you should deduct the difference from your output tax in the fourth quarter |
£___ |
If you only make supplies at two rates of tax, you can skip step 2, 7, 8, 9 and 12.
3.4.2 If you set ESP for standard-rated goods
The adjustment must take account of any disposals since the last adjustment which were not made by way of retail sale. You do this by excluding from the figures used in the calculation the value of any goods which were previously part of the scheme calculation, or included in the opening stock figure, but have not been sold by way of retail.
The adjustment is also required if a part of your business leaves the scheme.
| Step | Description | Amount |
|---|---|---|
| 1 | When you begin to use the scheme establish the fully adjusted ESP of your opening stock of standard-rated goods for retail sale | £__ |
| 2 | Total the fully adjusted ESP of your standard-rated goods received, made or grown for retail sale in the 4 quarters | £__ |
| 3 | Add together the totals at step 1 and step 2 | £__ |
| 4 | At the end of the scheme year, or when you cease to use the scheme, establish the fully adjusted ESP of your closing stock of standard-rated goods for retail sale (this becomes your standard-rated opening stock figure for the next year) | £__ |
| 5 | Deduct the figure at step 4 from the figure at step 3. This gives the ESP for the standard-rated goods you have sold by retail sale in the year | £__ |
| 6 | Multiply the figure at step 5 by 1/6 (VAT at 20%) | £__ |
| 7 | Add up the output tax you have paid under the retail scheme in the 4 quarters | £__ |
| 8 | If the figure at step 6 is greater than the figure at step 7 you have paid too little tax for your standard-rated supplies of goods and you should add the difference to your output tax in the fourth quarter. If the figure at step 6 is smaller than the figure at step 7 you have paid too much tax for your standard-rated supplies of goods and you should deduct the difference from your output tax in the fourth quarter |
If you also make supplies at the reduced rate repeat steps 1 to 8 substituting reduced-rated for standard-rated, and at step 6 swap 1/21 for 1/6.
4. DGT checklist
4.1 What must be included in your DGT
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.
4.2 Adjusting your DGT
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 of VAT Notice 727/4 for further details.
5. Special transactions
5.1 Exports to countries outside the EU
5.1.1 Retail Export Scheme
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.
5.1.2 Direct Refund Scheme
Sales under the direct reclaim system (paragraph 5.7 of Notice 704) should be treated as a normal accounting sale to the refund company.
5.1. 3 Administrative charges
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.
5.2 Goods bought at one rate and sold at another
All 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, you must enter them in your records 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, you must enter in your scheme records at the tax rate that applied when you received them. When they’re 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.
5.3 Credit transactions
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.
5.4 Goods bought from unregistered suppliers
If you buy goods for retail sale from suppliers who are not registered for VAT, you must include these goods in your scheme calculation for the rate normally applicable to those goods.
5.5 Recall of goods by manufacturers
If a manufacturer recalls contaminated or otherwise faulty goods you must adjust your ESP records.
6.Goods linked in a business promotion — Correcting ESP
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:
- 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