Retail schemes (VAT Notice 727)
Accounting for VAT using retail schemes if you're a VAT-registered business and you cannot account for VAT using normal accounting.
Detail
This notice cancels and replaces Notice 727 (May 2012). Details of any changes to the previous version can be found in paragraph 1.1 of this notice.
1. Overview
1.1 What this notice is about
This notice tells you about the retail schemes available to you if you’re a VAT-registered business making retail sales and you are unable to account for VAT normal accounting.
It explains how to choose a scheme that best suits your business. It also provides information on matters common to all our schemes (for example, recording your Daily Gross Takings (DGT), or what to do if the VAT rate changes or if you cease using a retail scheme) and rules on special circumstances such as:
- catering supplies
- retail supplies made by chemists
- supplies made by florists
The changes are - this notice has been updated for consistency with the other retail schemes notices.
1.2 Retail schemes
The retail schemes are simplification methods to use to arrive at the value of your taxable retail sales and to determine what proportion of those sales are taxable at the different rates of VAT.
A retail scheme cannot alter the VAT liability of a supply or the elements to a linked supply, it just provides a mechanism for calculating the VAT due.
Any changes to the liability must be agreed outside of the scheme.
For example, as a concession, where the minor article satisfies the criteria set out in Business promotions and VAT (Notice 700/7), you may account for VAT on the minor item at the same rate as the main article.
1.3 Individual schemes
This notice does not tell you in detail how to operate each scheme. You can find further information on individual schemes in notices:
- 727/2 Bespoke retail schemes
- 727/3 How to work the point of sale scheme
- 727/4 How to work the apportionment schemes
- 727/5 How to work the direct calculation schemes
Each scheme has specific rules and turnover limits which have the force of law and are set out in the individual scheme notices.
You can get further advice by contacting the VAT: general enquiries helpline.
1.4 Force of law
Parts of this notice have the force of law under powers contained in regulations 66-75 of the VAT Regulations 1995, (‘the Regulations’) that enable the Commissioners to determine a retail scheme method in a notice published by them.
Paragraphs 4.5, 6.2, 6.5, 7.1, 7.3, 7.5, 7.6, 7.7, 8.3, 8.4, 8.5, 8.6, 8.7 and 9.4 have the force of law. The items concerned are flagged accordingly.
2. Using retail schemes
2.1 Who can use a retail scheme
Retail is the selling of goods or services to consumers and the retail schemes are aimed at retailers that cannot account for VAT using normal accounting.
2.2 Normal accounting for VAT
Accounting for VAT in the normal way does not require you to issue a tax invoice to unregistered customers, but it does require you to identify, for each sale, the tax exclusive value and the VAT and to be able to produce periodic totals of those amounts.
2.3 What you can account for using the schemes
Under the Regulations, you can only use the retail schemes to account for retail sales.
If you make a mixture of retail and non-retail sales you can use a retail scheme to calculate the tax due on your retail sales only. You must account for non-retail sales using the normal method of accounting.
2.4 Choosing a retail scheme
Section 3 and section 5 explain briefly the way in which the different schemes work and how they suit different types of business. You will find further information about individual schemes in the specific retail scheme notice.
If, after reading sections 3 and 5, you find that you’re eligible for more than one scheme, you will need to choose the one best suited to your particular business. You should consider factors such as the complexity of the calculations and the amount of paperwork, record keeping or stock taking you will need to undertake, relative to the other schemes available to you.
Section 10 shows a comparison in table form. The valuation of the tax due may vary from scheme to scheme.
2.5 What you must do if you make sales to other VAT-registered businesses
You must issue a tax invoice to VAT registered customers. Invoicing is explained in sections 16 and 17 of VAT guide (Notice 700).
These sales should be accounted for under normal accounting rules unless they are of an occasional nature or made using a less detailed VAT invoice (the VAT guide, paragraph 16.6).
3. Standard schemes
3.1 The standard schemes
The standard schemes take their name from the principle on which they’re based. They are:
- the point of sale scheme
- 2 apportionment schemes
- 2 direct calculation schemes
You can choose any of the published schemes for which you’re eligible.
3.2 Turnover limits of the standard schemes
If your annual turnover of all taxable retail sales, excluding VAT, is above £130 million, you cannot use the published standard schemes.
If you think your annual turnover is about to exceed £130 million, you should contact HMRC as soon as possible to agree a bespoke retail scheme.
A bespoke retail scheme will be tailored to meet the particular requirements of your business and is likely to be an adaptation, to a greater or lesser extent, of one of the published schemes.
You can find further information about bespoke schemes in VAT Notice 727/2: bespoke retail schemes.
3.3 Circumstances where HMRC may refuse use of a retail scheme
We may refuse use of a retail scheme:
- if you can reasonably be expected to account for VAT in the normal way
- if the scheme you have chosen does not produce a fair and reasonable result
- for the protection of the revenue
Paragraphs 3.4 to 3.13 give further details of each scheme.
3.4 Point of sale scheme
3.4.1 How the point of sale scheme works
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.
This usually means using a till system which is capable of distinguishing between goods sold at different rates of VAT. But you can use the scheme if you can separate your sales in another way, for example by using separate tills for different rates.
Once your system has produced the total value of sales at each rate, you calculate your output tax by applying the appropriate VAT fraction to the relevant portion of your DGT see paragraph 4.6.
If you make only standard or only reduced-rated sales, you must use this scheme.
3.4.2 Factors to consider before choosing the point of sale scheme
The point of sale scheme is potentially the simplest and most accurate scheme. But electronic tills can be expensive and you and your staff need to be able to operate the system correctly even at the busiest times. Notice 727/3: how to work the point of sale scheme provides further information and sets out the specific rules some of which have force of law.
3.5 Apportionment scheme 1
3.5.1 How apportionment scheme 1 works
Apportionment scheme 1 is the simpler scheme designed for smaller businesses with a tax exclusive retail turnover not exceeding £1 million.
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.
For example, if 50% of the value of your goods purchased for retail sale are standard-rated, then 50% of your takings are treated as standard-rated.
You then calculate your output tax by applying the relevant VAT fraction (or fractions if more than one positive rate is used) to the standard-rated takings figure.
Once a year you make a similar calculation based on your purchases for the year. This is compared with the VAT you have paid in order to correct any over or under payment.
3.5.2 Factors to consider before choosing apportionment scheme 1
The scheme is relatively simple. But if, on average, you achieve a higher mark-up for your zero-rated goods than your reduced or standard-rated goods, you may find that you pay more VAT if you use apportionment scheme 1 than you would using another scheme. Also you:
- can only use the scheme if your total tax exclusive turnover from retail sales does not exceed £1 million
- cannot use the scheme for supplies of services, for supplies of goods which you have made or grown yourself or for supplies of catering
Notice 727/4: how to work the apportionment schemes provides further information and sets out the specific rules some of which have force of law.
3.6 Apportionment scheme 2
3.6.1 How apportionment scheme 2 works
Apportionment scheme 2 is available for businesses with a tax exclusive retail turnover not exceeding £130 million.
Under this scheme, you calculate the Expected Selling Price (ESP) of standard and lower-rated goods you receive for retail sale. You then work out the ratio of these to the ESP of all goods received for retail sale and apply this ratio to your takings.
For example:
- 60% of the ESP of goods you receive for retail sale are standard-rated
- 40% are zero-rated
You calculate your output tax by applying the relevant VAT fraction to these figures. So 60% of your takings are treated as standard-rated and 40% as zero-rated.
There is no annual adjustment as such, but the scheme uses a rolling 12-month calculation.
3.6.2 Factors to consider before choosing apportionment scheme 2
The scheme can be complex to operate but, if you operate it correctly, it will provide you with a more accurate valuation of your supplies over a period of time. Also you:
- can only use the scheme if your total tax exclusive retail turnover from retail sales does not exceed £130 million
- must be able to work out the ESP of your stock on hand when you start to use the scheme
- cannot use the scheme for supplies of services or catering
Notice 727/4: how to work the apportionment schemes provides further information and sets out the specific rules some of which have force of law.
3.7 Direct calculation scheme 1
3.7.1 How direct calculation scheme 1 works
Direct calculation scheme 1 is available to businesses with a tax exclusive retail 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.
As a general rule you must normally calculate the selling price of your minority goods. These are the goods at the rate of VAT which forms the smallest proportion of your retail sales.
But you may mark up your majority goods if this would be a simpler option for your business and would produce a fair and reasonable result. For example, if you’re a newsagent you may find that marking up your majority sales of newspapers and magazines is more straightforward than marking up your minority sales of tobacco and confectionery which may have been purchased from various sources.
3.7.2 Examples of how to work out your output tax under direct calculation scheme 1
Your minority goods are your zero-rated goods if you make:
- 60% standard-rated sales
- 40% zero-rated sales
You therefore calculate the ESP of the zero-rated goods you receive, make or grow for retail sale and deduct that amount from your DGT. This gives the figure for standard-rated sales to which you apply the VAT fraction to arrive at your output tax figure.
You calculate the ESP of the standard-rated goods received, made or grown for retail sale and apply the VAT fraction to that figure to arrive at your output tax if you make:
- 60% zero-rated sales
- 40% standard-rated sales
Although it does not form part of this calculation, the record of DGT is still a requirement of the scheme.
3.7.3 Factors to consider before choosing direct calculation scheme 1
Direct calculation scheme 1 can be relatively simple if you have a small proportion of sales at one rate of VAT. But the scheme can produce inaccuracies if the ESP is not calculated accurately. Additionally it can be complex to work out if you sell goods at 3 rates of VAT, though it may be possible to account for a small number of goods at a third rate outside the scheme.
You should also consider the following:
- you cannot use direct calculation scheme 1 if your annual tax exclusive retail turnover exceeds £1 million
- if your minority sales are zero-rated you may not use the scheme for zero-rated services
- if your minority sales are standard-rated you may not use the scheme for standard-rated services
- the scheme may not be used for supplies of catering
Notice 727/5: how to work the direct calculation schemes provides further information and sets out the specific rules some of which have force of law.
3.8 Direct calculation scheme 2
Direct calculation scheme 2 works in the same way as direct calculation 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.
Notice 727/5: how to work the direct calculation schemes provides further information and sets out the specific rules some of which have force of law.
4. Special rules about the standard schemes
4.1 Mixed use of the schemes
Normally the retail scheme calculation will be a single calculation for the whole of your VAT registration.
Subject to the rules of the schemes you may be able to use:
- the same scheme separately at a number of distinct business locations
- different schemes at the same location
But, you cannot use different versions of the direct calculation or apportionment schemes and you must not use an apportionment scheme in some parts of your business and a direct calculation scheme in other parts.
You may need to make adjustments to account for transfers of goods between different parts of the business. You must agree the details of such adjustments with HMRC.
You can always use the normal method of accounting together with any scheme or any allowable mixture for which you’re eligible.
4.2 Changing schemes
You can change schemes at the end of a complete year reckoned from the beginning of the tax period in which you first adopted the scheme. You must use the scheme for 12 months, unless either:
- you become ineligible for the scheme you are using
- HMRC allows or requires an earlier change
If you become ineligible, you must cease to use the scheme from the end of the next complete accounting period.
For example, if you account for VAT by reference to quarters ending March, June, September and December and your turnover makes you ineligible for a scheme during February, you must cease to use that scheme to account for supplies made on or after 1 July. Some schemes require adjustments when you cease to use them see paragraph 6.1.
4.3 Changing schemes retrospectively
Retrospective changes to retail schemes are not normally allowed. The VAT and Duty Tribunals have repeatedly confirmed the principle that, where you operate a scheme according to the published rules (or an agreed variation), the tax which is due under that scheme is the correct VAT for the period. You cannot change schemes retrospectively simply because another scheme produces a lower or different valuation.
HMRC may allow retrospective change in exceptional cases. If you think you have exceptional grounds for a retrospective change you should contact HMRC, giving as much detail as possible.
The maximum period for recalculation following a retrospective change of scheme is 4 years and you must have been, and remain, eligible to use the new scheme during the full period which your application relates to.
4.4 You must keep a record of your DGT
All the retail schemes require a record of the value of your retail sales called the DGT. From the day you start to use a scheme you must keep a record of your DGT in accordance with the scheme conditions.
4.5 Recording your DGT
The following paragraph has the force of law.
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.
There is a DGT checklist in each of the scheme notices and you must ensure that your record complies with the requirements in that checklist.
If your turnover is less than £1 million and you run a business where your customers do not pay for the goods when they receive them (for example, you may be a milkman or newsagent), you may take account of opening and closing debtors in your scheme calculations as follows:
| First period of using a retail scheme | Amount |
|---|---|
| Takings for the period | £30,000 |
| Closing debtors | (£1,500) |
| Gross takings for retail scheme purposes | £28,500 |
| Next period | Amount |
|---|---|
| Opening debtors | + £1,500 |
| Takings for the period | £31,000 |
| Closing debtors | (£1,600) |
| Gross takings for retail scheme purposes | £30,900 |
4.6 Keeping records of DGT
You must keep a record of your DGT because, for most schemes, you work out the VAT on your sales (your output tax) by applying the VAT fraction to the appropriate portion of your DGT. The VAT fraction is simply a way of finding out how much VAT is contained in the total gross takings. You can find more about the VAT fraction in VAT guide (Notice 700).
4.7 Tax periods for retail schemes
The standard tax period is quarterly. There are no special requirements if you’re on standard tax periods and using a retail scheme. The VAT guide (Notice 700) contains guidance on tax periods.
If you’re on the annual accounting scheme you must follow the rules set out in VAT annual accounting (Notice 732).
5. Ceasing to use a retail scheme
5.1 What you must do when ceasing to use a retail scheme
Depending on the scheme you use, you must follow the rules in the scheme notice, summarised here.
| Scheme | Procedure |
|---|---|
| Point of sale | No adjustment on ceasing to use for all or part of a VAT registration |
| Apportionment 1 | You must perform a closing adjustment, as for the annual adjustment, even if you leave before the anniversary of starting to use the scheme |
| Apportionment 2 | Normally no adjustment is necessary. But if you are ceasing to use this scheme in part of your business but are continuing to use it in other parts of the registration, make sure that the rolling calculation reflects the ESP of stock now excluded from the apportionment calculation |
| Direct calculation 1 | Normally no adjustment is necessary |
| Direct calculation 2 | You must make a closing adjustment, as for the annual adjustment, even if you leave before the anniversary of starting to use the scheme. The adjustment must take account of any disposals made during the year which were not by way of retail sale. This is done by excluding from the figures used in the calculation the value of any goods which were previously part of the scheme calculation but were not retail sales |
5.2 Additional rules when ceasing to use a scheme
Apart from these special rules that apply to each retail scheme, you should also note that:
- only goods sold by retail can be included in a retail scheme, if you cease to use a scheme because you transfer part or all of your business as a going concern, the value of stock transferred will have to be excluded from your retail scheme
- if you cease to trade, VAT may become due on the value of your stocks and assets see VAT Notice 700/11: cancelling your registration
HMRC may require additional adjustments where unusual patterns of trade prevent your scheme from producing a fair and reasonable result.
You must always tell HMRC of changes to your business structure.
6. Changes of tax rate or liability
6.1 About this section
This section supplements the rules in the ‘How to work’ notices and has the force of law under Regulation 75 of the Value Added Tax Regulations 1995 (SI 1995/2518). It tells you how you should deal with supplies following a change in either the VAT rate or the liability of supplies.
6.2 Definition of a change of VAT rate
This paragraph has force of law.
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.
6.3 How to check if a new rate of VAT has been introduced
Any new rate of VAT will be widely publicised. When a change in the VAT rate occurs it may be done at very short notice, for example, following a Budget. Whether you use a computer or not you should have a system in place to cope with an unexpected change in VAT rates.
6.4 Definition of a change in liability
A change in tax liability occurs when there’s any change in the liability of a supply for example, an exempt supply might become taxable at a positive rate or be included within the zero rate, a zero rate supply might become taxable or exempt or a supply which is currently taxed at a positive rate might become exempt or be included within the zero rate. It can also mean a change from standard to reduced rate or the other way around.
6.5 Accounting for VAT under your chosen scheme if the rate of VAT changes
Section 6.5 has the force of law.
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.
7. Catering adaptation
This section supplements the rules in the ‘How to work’ notices.
7.1 Why an adaptation for catering supplies is necessary
The apportionment and direct calculation schemes assume that goods bought at one rate of VAT will be sold at the same rate. But food bought at the zero rate often becomes reduced or standard-rated when sold in the course of catering.
The following sentence has the force of law.
Catering sales must normally be accounted for using the Point of Sale Scheme (Notice 727/3) to establish your VAT liability.
7.2 The catering adaptation
If you are unable to use the point of sale scheme, you can use the catering adaptation. This is an alternative to the point of sale scheme and may be used by businesses subject to the conditions listed in paragraph 7.3.
7.3 Conditions for using the catering adaptation
Section 7.3 has the force of law.
You may use the catering adaptation described in paragraphs 7.7 and 7.8 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
7.4 If you do not comply with the conditions
If you do not comply with the conditions of the catering adaptation, HMRC may:
- assess for the underdeclared VAT arising from unsatisfactory use of the catering adaptation
- refuse use of the catering adaptation for future periods
7.5 Starting to use the catering adaptation
Section 7.5 has the force of law.
If you wish to use the catering adaptation and meet the conditions detailed in paragraph 7.3 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.
7.6 Maintaining records
Section 7.6 has the force of law.
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.
7.7 Calculating output tax under the catering adaptation
Section 7.7 has the force of law.
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 7.8. | = % |
| 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 7.8 | = % |
| 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 |
7.8 Calculating the percentage of standard-rated sales
Section 7.8 has the force of law.
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.
8. Retail chemist adjustment
This section supplements the rules in the ‘How to work’ notices.
8.1 Goods supplied on prescription
The supply of goods dispensed by a registered chemist on the prescription of a medical practitioner is zero-rated under Group 12 of Schedule 8 to the VAT Act 1994 (Group 12). You can find further information in Health professionals, pharmaceutical products and VAT (Notice 701/57).
8.2 Why an adjustment is necessary
Most group 12 goods dispensed on prescription are standard-rated when bought by the chemist but zero-rated when supplied to the patient. But, a number of items supplied on prescription such as gluten free bread are zero-rated when bought and some items, such as smoking cessation products, are charged at the reduced rate when bought. Consequently, a further adjustment is necessary.
8.3 How retail chemist adjustment applies to other retail schemes
The following 2 paragraphs have the force of law.
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.
Other retail schemes require the adjustments described in paragraph 8.4 in order to reduce the output tax which the scheme would otherwise produce.
If you use a Direct Calculation Scheme, you must normally calculate ESP for your ‘minority’ goods. But if your minority goods are standard-rated sales, you may calculate ESP on the basis of the zero-rated goods received for resale if this would be simpler for your business.
8.4 How the retail chemist adjustment works if you use the direct calculation schemes or apportionment scheme 1
Section 8.4 has force of law.
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 below). | £ ___ |
| 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) | £ ___ |
| 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. | £ ___ |
8.5 Estimating the percentage of zero-rated supplies
One of the adjustments set out at paragraph 8.4 requires you to estimate a value for payments for all group 12 goods that were zero-rated when you received them (see steps 3 and 4 of paragraph 8.4). You must be able to satisfy us if we visit you that your estimation gives a fair and reasonable valuation in any period.
The following paragraph and 3 bullet points have the force of law.
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
8.6 Estimating the percentage of reduced rated supplies
One of the adjustments set out at paragraph 8.4 requires you to estimate a value for payments for all group 12 goods that were charged at the reduced rate when you received them (see steps 3 and 5 of paragraph 8.4). You must be able to satisfy us if we visit you that your estimation gives a fair and reasonable valuation in any period.
The following paragraph and bullet points have the force of law.
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
8.7 Annual adjustment when using direct calculation scheme 2
Section 8.7 has the force of law.
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. 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 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 9.4.
d) add together the figures from each of the quarterly schedules (paragraph 9.4) 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 9.4) 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.
9. Special arrangements for florists
9.1 About this section
This section applies to florists or other retailers who are members of organisations such as Interflora and Teleflorist which facilitate the purchase and delivery of flowers. For the purposes of this section these organisations are referred to as agents. It supplements the rules in the ‘How to work’ notices.
9.2 Why an adjustment is necessary for sales made by florists
The adjustments you make will depend on your retail scheme and whether or not you are the member of an organisation such as one of those referred to in paragraph 9.1 who:
- receives payment direct from the customer (the sending member)
- delivers the flowers and receives payment from the agents (the executing member)
9.3 Treatment of invoices issued by an agency
The documents you receive from the agency may show the output tax which you must pay to HMRC. This is known as self-billed output tax because the agency issues the invoice for the sales you make. You should check your agency documentation carefully and bring any tax shown to account outside your retail scheme. You do this by adding the self-billed output tax to any VAT calculated in accordance with your retail scheme.
You should find more about self-billed output tax in your agency documentation. You can find further information in VAT guide (Notice 700) or you can contact HMRC.
9.4 How the adjustment works
Section 9.4 has the force of law.
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 |
10. Comparison of the retail schemes
| Point of sale | AP1 | AP2 | DC1 | DC2 | |
|---|---|---|---|---|---|
| Can I use the scheme for services | Yes | No | No | Only if they’re liable at a different rate from your minority supplies | Only if they’re liable at a different rate from your minority supplies |
| Can I use the scheme for catering supplies | Yes | No | No | No | No |
| Can I use the scheme for goods I have made or grown myself | Yes | No | Yes | Yes | Yes |
| Does the scheme have an annual turnover limit | Yes £130m |
Yes £1m |
Yes £130m |
Yes £1m |
Yes £130m |
| Will I have to work out ESP | No | No | Yes | Yes | Yes |
| Will I have to carry out a stock take | No | No | Yes, when you start to use the scheme | No | Yes, when you start to use the scheme and annually thereafter |
| Will I have to carry out an annual adjustment | No | Yes | No, but you use a rolling calculation | No | Yes |
If your annual tax exclusive turnover from retail supplies is more than £130 million you must agree a bespoke scheme with HMRC.
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Updates to this page
Published 11 May 2012Last updated 21 July 2020 + show all updates
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Section 7 has been updated with information about the temporary reduced rate.
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First published.