VAT Schemes : Keeping It Simple
In the latest instalment of our Back to Basics series we explore VAT retail schemes
VAT retail schemes are a specialist ones used by retail businesses to account for VAT. The schemes are usually used by businesses that sell a significant amount of low value and/or small quantity items to the public with different VAT liabilities. The use of the scheme can save businesses a significant amount of time in calculating the amount of VAT due to HMRC on each and every sale. In many circumstances, it would be difficult for these businesses to account for VAT using standard VAT accounting. By using the VAT retail scheme, retailers are able to calculate VAT due to HMRC at the standard, reduced and zero rates of VAT as a proportion of sales. Usually this is done on a day-by-day basis.
There are a number of standard retail schemes published by HMRC as well as the option of using a bespoke scheme. The decision as to which retail scheme to be used is usually driven by a combination of looking at the scheme that provides the best result for the business in question combined with the cost of using the scheme with the important caveat that HMRC are of the opinion that the chosen scheme is fair and reasonable.
Law: Most of the underlying law that pertains to retails schemes is contained with the VAT regulations (VAT Regulations 1995, Part IX (regulations 66-75)) and certain paragraphs within HMRC’s notices also have force of law.
Standard retail schemes: There are a number of standard retail schemes published by HMRC. These standard retail schemes can be used by businesses with an annual VAT exclusive turnover of up to £130 million. These are maximum turnover limits and if the limit is exceeded a bespoke scheme must be used. There are also lower limits for some of the standard schemes.
Standard retail schemes are suitable for most retail businesses. However, there are special arrangements and rules for caterers and catering, chemists and florists.
There are three main categories of standard retail schemes:
• Point of sale scheme
• Apportionment scheme
• Direct calculation scheme
Point of sale scheme: Using the point of sale scheme businesses calculate the tax due on sales by identifying the correct VAT liability at the time a sale is made. This is usually done by way of an electronic till system that can differentiate between goods sold at different VAT rates. Once the business has calculated the applicable daily turnover, known as Daily Gross Takings or DGT the retail scheme will allow for the calculation of how much of the DGT related to gross takings made at each VAT rate. Businesses can then work out the VAT due by multiplying each of those proportions of the DGT by the appropriate VAT fraction. Businesses that only make standard or only lower-rated sales must use this scheme.
Apportionment schemes: There are two separate apportionment schemes. The first is only suitable for businesses whose total tax exclusive turnover from retail sales do not exceed £1 million per annum. The scheme is relatively simple to use and looks at the value of a retailers purchases for resale at each VAT rate and applies these proportions to total sales. For example, if 60% of the value of purchases are standard rated then 60% of the takings would be treated as standard-rated. The scheme cannot be used for supplies of services, for supplies of goods that have been made or grown by the business or for supplies of catering.
The second apportionment scheme, known as Apportionment scheme (2) is open to businesses with a tax exclusive turnover not exceeding £130 million. Under this scheme, businesses calculate the Expected Selling Prices (ESPs) of standard and lower-rated goods they receive for retail sale. The ratio of ESPs to all goods is then used to calculate what proportion of DGT relates to VAT on sales of standard and lower rated goods.
Businesses that achieve a higher mark-up for zero-rated goods may find that the apportionment scheme would result in them paying more VAT to HMRC than would otherwise have been the case.
Direct calculation schemes: There are also two versions of this scheme.
The first is available to businesses with a tax exclusive turnover of up to £1 million. Here, businesses calculate the ESP of goods for retail sale at one or more rates of VAT so that they can calculate the proportion of takings on which VAT is due. Businesses normally calculate the selling price of their ‘minority goods’ i.e. the goods at the rate of VAT which forms the smallest proportion of retail sales. However, businesses may use the total selling price of their ‘majority goods’ if this would be a simpler option and would produce a fair and reasonable result. To find the amount of VAT payable, businesses apply the relevant VAT fraction to this amount. Businesses that sell catering services cannot use this scheme.
The second direct calculation scheme works in the same way as the first scheme except that businesses need to make an annual stock adjustment. Businesses can use the scheme if their annual tax exclusive retail turnover does not exceed £130 million.
The direct calculation schemes are fairly simple to operate for businesses that make a small proportion of their sales at one rate of VAT and a large majority at another rate.
Bespoke schemes: A bespoke scheme is one written specifically for larger retailers whose turnover exceeds £130 million) that takes into account their individual circumstances and retail profile. A bespoke scheme must be agreed with HMRC.
A bespoke agreement will usually be based on one of the published schemes, but it can be based on any method which meets the criteria laid out by HMRC namely that the scheme is fair and reasonable.
According to HMRC a scheme that does not reflect commercial reality or unnecessarily complicates the ability of a business to account for VAT or of HMRC to conduct a VAT declaration audit is unlikely to be fair or reasonable.
Using retail schemes with other schemes: Businesses can use a retail scheme together with the cash accounting scheme and/or the annual accounting scheme. However, the retail scheme cannot be used in conjunction with the flat rate scheme. The flat rate scheme does have a version suitable for retailers. The retail schemes cannot be used with the margin schemes.
Business-to-business supplies: The use of the retail scheme is not suitable for business-to-business sales that must be handled outside retail scheme calculations.
Published October 2013