Understanding VAT for retail: point-of-sale, apportionment, direct calculation

by Jul 27, 2020retail

There are three different schemes for managing VAT in retail settings. The trickier they are to administer, the more accurate the final bill tends to be. Which is best for you?

VAT has been in the news lately.

In the run-up to the Chancellor Rishi Sunak’s mini-Budget on 8 July, there was loads of talk of a potential across-the-board VAT cut to encourage consumers to get out and spend as lockdown eases.

Disappointingly, in the end, what we got was a targeted VAT cut designed to support hospitality and tourism – down from 20% to 5% on non-alcoholic drinks, restaurant meals, attractions and hotels, until 12 January 2021.

So, good news for those of our clients who operate takeaways and restaurants, but not so much for the high street shops we support.

Fortunately, we don’t need temporary cuts to help you reduce your VAT bill – there’s a lot that can be achieved by choosing the right scheme and with a bit of old-fashioned hard work and attention to detail.

There are three special VAT schemes for retail, each designed to avoid businesses having to report on every individual sale. Instead, each takes a different approach to estimating and averaging.

VAT apportionment scheme

There are actually two apportionment schemes but both are built on the same principle: you estimate how much business you’ll be doing and pay VAT as a portion of that estimate.

In apportionment scheme one, you estimate the split of gross takings between different kinds of turnover.

Under the second apportionment scheme, you come up with a figure for the expected selling price (ESP) of standard and lower-rated goods and then work out the ratio of those to the ESP of all goods received for sale.

The appeal of apportionment is that because it’s based on long-term estimates, you don’t have to dig into the detail anywhere near as much.

Equally, because you’re working from broad estimates, it’s very easy to end up paying more than necessary – especially if you’re the kind of person who errs on the side of caution when you’re making your calculations.

And under scheme one especially, if you get a higher markup for your zero-rated goods than your reduced or standard-rated stock, you might pay relatively more VAT.

VAT Point-of-sale scheme

Point-of-sale is also dead simple and works by identifying the VAT rating at the moment you make each sale – but it only applies in certain circumstances.

If everything you sell has a reduced rating or is standard rated – not usually the case for convenience stores.

If you use a decent EPOS system that’s integrated with your accounting setup and can record the VAT rate of the product in each sale.

It’s not about reporting on each specific item, just coming up with an accurate final total for each VAT rating category, against which the final bill can be calculated.

The downsides are that you’re reliant on the VAT rate of each item of stock being accurately recorded in the system or, worse, staff manually recording the right information against each sale.

Remember, HMRC doesn’t care why you got it wrong – it just expects it to be right.

How to calculate VAT for retailers

You need to calculate the expected total selling prices of goods at each rate and then use that to work out an overall average of VAT for your entire turnover.

The maths are more complicated and take more time but the end result is usually more accurate – and better accuracy often means more money in your pocket.

It is generally recommended for businesses that make a small proportion of sales at one VAT rate and the majority at another, but actually applies to any retail business selling goods at one or more VAT rates.

For convenience stores whose VAT returns we handle, we almost always prefer the direct calculation scheme.

Exceptions

First, if you’re fortunate enough to have an annual turnover of taxable retail sales excluding VAT of over £130 million per year, you’ll need to negotiate a tailored scheme with HMRC.

Secondly, HMRC has the right to refuse you the right to use a VAT retail scheme if, to put it plainly, it thinks you’re not really running a retail business, or believes you’re persistently paying too little VAT.

Talk to us today for smart advice on VAT for your retail business.

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