There are several VAT retail schemes that can be used instead of accounting for VAT in the standard way, which can simplify VAT accounting for retailers.
Alternatively you may be able to agree a bespoke scheme with HMRC, dependent on your business model.
If you do not use a VAT retail scheme, you will need to record the VAT on each sale in your accounting records. Using a VAT retail scheme, you work out the value of your total VAT taxable sales for a period – e.g a day – and the proportions of that total sale that are taxable at standard, reduced and zero VAT rates under your scheme. You then apply the appropriate VAT fraction to the sales figure to calculate the VAT due.
In general terms, choosing the appropriate scheme is dependent on the size of your tax exclusive turnover. The effective cut off points are below £1m and between £1m and £130m. If your turnover figure exceeds £130m you need to agree a bespoke scheme with your local VAT Business Advice Centre.
You can only use the retail scheme for supplies that you make by way of retail and you must still issue a VAT invoice to any VAT registered customer who requests one.
Lastly, HMRC must be satisfied that the retail scheme you have chosen gives a fair and reasonable result in the amount of VAT paid.
The three standard types of VAT retail scheme are:
The Point of Sale Scheme
The simplest and most accurate scheme, but requires investment in electronic tills. Under the Point of Sale scheme you calculate the tax due on your sales by identifying the correct VAT liability at the time you make the sale.
Apportionment Scheme 1 is a simpler scheme designed for businesses with a tax exclusive turnover not exceeding £1m. Under this scheme you calculate the value of your purchases for resale at different rates of VAT and apply the proportions of those purchase values to your sales. Apportionment Scheme 2 is available for businesses with a tax exclusive turnover not exceeding £130 million. Under this scheme you calculate the Expected Selling Prices (ESPs) of standard and lower-rated goods you receive for retail sale. You then work out the ratio of these to the ESPs of all goods received for retail sale and apply this ratio to your takings.
Direct Calculation Schemes
The Direct Calculation scheme (1) is available to businesses with a tax exclusive turnover not exceeding £1 million. Under this scheme, you calculate the ESP of goods for retail sale at one or more rates of VAT so that you can calculate the proportion of your takings on which VAT is due. Direct Calculation scheme (2) works in the same way as scheme (1), but requires you to make an annual stock adjustment. You can use the scheme if your annual tax exclusive retail turnover does not exceed £130 million. If you start to use this scheme you will need to know the ESP of the minority goods in stock.
For more details on the schemes see: http://customs.hmrc.gov.uk/channelsPortalWebApp/channelsPortalWebApp.portal?_nfpb=true&_pageLabel=pageLibrary_PublicNoticesAndInfoSheets&propertyType=document&columns=1&id=HMCE_CL_000139
VAT can be a highly complex area. Our specialists in this area can provide guidance and advice, so if you need clarification on any area of VAT, please do call us.