The UK’s Retail VAT Schemes are special accounting methods offered by HM Revenue & Customs (HMRC) that assist retailers with their VAT calculations and reporting. These schemes are designed to address the complexities that may arise when dealing with a high volume of low‑value sale transactions, a common situation for many retail businesses.
In today’s guide, we’ll explore an overview of the different VAT Retail Schemes available, their benefits, eligibility criteria, and how retailers can choose and implement the most suitable scheme for their operations.
An Overview of the UK’s Retail VAT Schemes
There are three primary Retail VAT Schemes available in the UK:
- Point of Sale Scheme
- Apportionment Scheme
- Direct Calculation Scheme
Each retail VAT scheme has unique features and calculation methods that cater to different retail environments’ needs. In the following sections, we’ll discuss these schemes in more detail.
Point of Sale VAT Scheme
The Point of Sale VAT Scheme is aimed at retailers that can easily identify the VAT liability for each transaction at the time of sale. This scheme is ideal for businesses with electronic point of sale (EPOS) systems or cash registers that can accurately calculate VAT on each sale.
Since EPOS systems can accurately record all transactions, the POS VAT scheme is a popular choice for many EPOS‑equipped retail outlets, from restaurants to newsagents, since much of the maintenance of records is taken care of by the EPOS unit.
Note: These records must be regularly retrieved from the EPOS units and stored in a central location with a fail‑proof backup strategy.
Benefits
- Simplifies VAT calculations by using the VAT rate at the point of sale.
- Automates the recording of transactions on the EPOS unit.
- Works well for businesses with modern EPOS systems or cash registers.
Eligibility
Suitable for businesses that can determine the VAT rate for each transaction at the time of sale. This is straightforward for retailers selling a consistent range of items or those that encode VAT rates per item in their EPOS system.
The Apportionment VAT Scheme
The Apportionment Scheme is intended for retailers who cannot identify the VAT for each transaction at the time of sale. Under this scheme, businesses calculate the total VAT due by applying a predetermined percentage to their daily gross takings.
Benefits
- Simplifies VAT calculation for businesses that cannot determine VAT for each transaction at the point of sale.
- Allows use of a set percentage to calculate VAT, making the process more manageable.
Eligibility
Suitable for businesses that cannot determine VAT liability at the point of sale and have a taxable turnover of £1 million or less per year (excluding VAT). For example, customizable product retailers (e.g., custom furniture manufacturers) often use this scheme.
Direct Calculation VAT Scheme
The Direct Calculation Scheme is designed for retailers who wish to use a bespoke method to calculate their VAT liability. Under this scheme, businesses develop their own unique method for calculating VAT, which must be approved by HMRC.
Benefits
- Offers flexibility for businesses requiring a tailored approach to VAT calculations.
- Can accommodate specific business needs and complexities that other schemes may not address.
Eligibility
Suitable for businesses with taxable turnover of £1 million or less per year (excluding VAT) that require a bespoke VAT calculation method. For example, used car dealerships using the margin scheme (VAT on profit margin) rather than full selling price.
Choosing the Right Retail VAT Scheme
To choose the most suitable Retail VAT Scheme, consider:
- Business Size: Larger businesses with complex operations may benefit from the Direct Calculation Scheme, while smaller retailers may prefer POS or Apportionment Schemes.
- VAT Calculation Complexity: Retailers with EPOS systems can use the POS Scheme, whereas those unable to determine VAT per transaction might opt for Apportionment or Direct Calculation.
- Bespoke Requirements: Businesses needing a tailored VAT method should consider the Direct Calculation Scheme, subject to HMRC approval.
Implementing and Maintaining Retail VAT Schemes
Retailers should follow these procedures when implementing and maintaining their chosen scheme:
- Record Keeping: Maintain accurate records of gross takings, VAT calculations, and supporting documentation.
- Scheme Approval: For Direct Calculation, obtain HMRC approval with detailed method submissions.
- Periodic Review: Regularly review scheme suitability and switch if business needs change.
- VAT Returns: Submit accurate and timely VAT returns using the chosen scheme’s calculations, retaining documentation for audits.
Potential Drawbacks and Considerations
- Eligibility Restrictions: Ensure turnover limits and criteria are met to avoid disqualification.
- Complexity of Bespoke Methods: Developing a custom method can be time‑consuming and requires HMRC approval.
- Compliance Requirements: Maintain accurate records and submit returns on time to avoid penalties.
- Scheme Suitability: Evaluate business needs carefully; the wrong scheme can increase administrative burden.
Conclusion
Retail VAT Schemes simplify VAT calculation and reporting for retailers by offering options tailored to different business models. Understanding each scheme’s features, benefits, eligibility criteria, and implementation requirements empowers retailers to choose the best fit for their operations.
Careful evaluation and professional advice ensure compliance with HMRC regulations and efficient VAT management.