VAT for retail businesses

If you run a retail business, VAT affects almost every aspect of your operations - from the prices you display to how you account for gift vouchers and handle returns. Retail VAT has specific rules that differ from other businesses because you typically sell many small-value items to the general public rather than issuing invoices for each sale.

This guide covers the VAT rules specific to retail, including when you must register, how to display prices correctly, and how to use retail schemes to simplify your VAT calculations.

When you must register for VAT

The same registration rules apply to retailers as to other businesses. You must register for VAT if your taxable turnover exceeds the threshold, or you can register voluntarily if below it.

VAT registration threshold and requirements

£90,000 turnover threshold triggering mandatory VAT registration and Making Tax Digital compliance

VAT registration becomes mandatory when your taxable turnover exceeds £90,000 in a rolling 12-month period (as of 1 April 2024). You can also register voluntarily below this threshold.

Mandatory threshold: £90,000 taxable turnover in rolling 12 months
Registration deadline: 30 days after exceeding threshold
Voluntary registration: Allowed at any turnover level
Deregistration threshold: £88,000 - can deregister if turnover falls below
Standard rate: 20% (most goods and services)
Reduced rate: 5% (domestic fuel, children's car seats, etc.)
Zero rate: 0% (most food, books, children's clothes, etc.)

What counts as 'taxable turnover':

Includes: Standard-rated, reduced-rated, and zero-rated sales
Excludes: VAT-exempt sales (insurance, finance, education, health), goods sold outside the UK
Calculate over rolling 12-month period - if last 12 months exceed £90,000, you must register
Future test: If you expect to exceed £90,000 in next 30 days alone, register immediately

Making Tax Digital (MTD) for VAT - mandatory for ALL VAT-registered businesses:

You must keep digital VAT records using MTD-compatible software
Submit VAT returns directly from the software via HMRC API
Applies to all VAT-registered businesses regardless of turnover (since April 2022)
Penalties for non-compliance: Points-based penalty system (4 points for quarterly, 5 for monthly, 2 for annual filers trigger penalties). Late filing penalties start from £200 per late submission after reaching penalty point threshold

Should you register voluntarily below £90,000?

Reasons TO register:

Reclaim VAT on business purchases and expenses (especially valuable for high capital expenditure)
Appear more established and professional to B2B customers
Necessary to trade with VAT-registered B2B customers who want VAT invoices

Reasons NOT to register:

Administrative burden of VAT returns, MTD software, and record-keeping
20% price increase if selling to consumers who can't reclaim VAT
Cash flow impact - you collect VAT from customers and pay it to HMRC before receiving payment if not using Cash Accounting scheme

VAT schemes for small businesses:

Flat Rate Scheme: Pay flat percentage (6.5%-14.5% depending on sector) of gross turnover instead of tracking input VAT. Available when joining VAT if turnover under £150,000. You must leave the scheme if turnover exceeds £230,000 (including VAT).
Cash Accounting: Pay VAT when customers pay you, not when you invoice. Join if turnover under £1.35 million, leave if exceeds £1.6 million.
Annual Accounting: File one VAT return per year instead of four, make advance payments. Join if turnover under £1.35 million, leave if exceeds £1.6 million.

Penalties for late registration:

You must pay VAT due from when you should have registered, even if you didn't charge customers
Late registration penalty: Percentage of VAT due for period of non-registration based on behaviour: Non-deliberate 0-30%, Deliberate 20-70%, Deliberate and concealed 30-100%. Minimum penalty £50
Criminal prosecution possible for deliberate failure to register

Deregistration: If your turnover falls below £88,000 (deregistration threshold), you can choose to deregister. You must deregister if you stop making taxable supplies altogether.

Official source: gov.uk/vat-registration-thresholds

Retail-specific considerations

For retailers, taxable turnover includes:

Standard-rated sales - most retail goods (clothes, electronics, homeware)
Zero-rated sales - certain food items, children's clothes, books
Reduced-rate sales - children's car seats, energy-saving products

Exempt sales (such as insurance products you might sell alongside goods) do not count towards the threshold but cannot be reclaimed either.

Important: If you sell a mix of standard-rated and zero-rated goods (like a convenience store selling food and household items), you should register once your combined taxable turnover exceeds the threshold - even if most of your sales are zero-rated.

Price display requirements

Retailers selling to consumers face strict rules about how prices must be displayed. Getting this wrong can result in unlimited fines under the Price Marking Order.

VAT-inclusive pricing requirements for retail

Legal requirements for displaying prices including VAT in retail settings.

VAT-inclusive pricing

Retailers selling to consumers (B2C) must display VAT-inclusive prices. The price on the shelf or ticket is the price the customer pays.

B2C sales requirement: Prices displayed to consumers MUST include VAT
B2B sales: Can show VAT-exclusive prices if clearly stated (e.g., plus VAT)
Online prices: Must show VAT-inclusive price before checkout
Price labels: Must show total price including VAT in sterling
Dual pricing: Permitted to show both inc. and ex. VAT if VAT-inclusive is prominent
Additional charges: Delivery and other mandatory fees must be shown before checkout
Penalty for breach: Unlimited fine under Price Marking Order

VAT rates on different goods and services

Practical pricing tips

When setting retail prices:

Round to consumer-friendly prices - work backwards from the VAT-inclusive price you want to display
Update price labels promptly - if VAT rates change, you must update displayed prices immediately
Check online prices - your website must show VAT-inclusive prices before customers reach checkout
Consider delivery charges - if delivery is mandatory, include it in the displayed price or show it clearly before checkout

Trade sales: If you also sell to trade customers (B2B), you can show VAT-exclusive prices to them, but make it clear this is for trade customers only. Keep your B2C pricing clearly marked as including VAT.

Selling goods at different VAT rates

Most retailers sell goods at different VAT rates. Understanding how to handle these 'mixed supplies' is essential for accurate VAT accounting.

VAT on mixed supplies - composite vs separate supplies

Rules for determining whether items sold together are a single composite supply or multiple separate supplies with different VAT rates.

Composite supply vs separate supplies

When you sell multiple items together, you must determine whether they form a single composite supply or separate supplies for VAT purposes.

This affects which VAT rate applies to the entire transaction.

Composite supply (single supply): One dominant element with ancillary items - all at one VAT rate
Separate supplies (multiple supplies): Distinct items priced separately - each at its own VAT rate
Key test - ancillary element: An element is ancillary if it does not constitute an aim in itself but is a means of better enjoying the principal service
Key test - closely linked: Elements are so closely linked that they form a single economic supply which it would be artificial to split
Example composite supply: Hot drink with a biscuit served in a cafe - single supply at standard rate
Example separate supplies: Book and DVD sold together - zero-rated book, standard-rated DVD (if priced separately)
Hampers and gift baskets: Mixed-rate items in hampers treated as separate supplies unless single price and elements not identifiable

VAT rates on different goods and services

Common retail mixed supply situations

Meal deals: When you bundle a sandwich (zero-rated if cold), a drink (standard-rated if not hot), and crisps (standard-rated), you need to apportion the single price between the different VAT rates based on the normal selling prices of each item.

Gift sets: A gift basket containing chocolates (standard-rated), tea (zero-rated), and a mug (standard-rated) requires apportionment. If you sell each item separately, use those prices. If not, use the cost prices to work out the proportion.

Books with digital content: A book sold with a CD or download code may need splitting - the physical book is zero-rated, but the digital content is standard-rated.

VAT retail schemes

Unlike other businesses, retailers cannot practically issue a VAT invoice for every sale. VAT retail schemes provide approved methods for calculating your VAT from your total takings.

VAT retail schemes overview

Introduction to VAT retail schemes for businesses selling mainly to non-VAT registered customers who cannot reclaim VAT.

VAT retail schemes are simplified methods for calculating VAT when it is impractical to issue a VAT invoice for every sale. They are designed for retailers who sell mainly to non-VAT registered customers (the general public) who cannot reclaim VAT.

Without a retail scheme, you would need to record the VAT on each individual sale. Retail schemes allow you to calculate your VAT liability from your total takings (daily gross takings or DGT).

Eligibility: Businesses making retail sales to non-VAT registered customers
Purpose: Calculate VAT output from total takings when individual invoicing is impractical
Standard schemes available: Point of Sale, Apportionment (1 and 2), Direct Calculation (1 and 2)
Bespoke schemes: Can agree a custom scheme with HMRC if standard schemes are unsuitable
Flat Rate Scheme users: Cannot use retail schemes - use the flat rate percentage instead

When to use a retail scheme

Use a retail scheme if you:

Make sales direct to the public
Cannot issue a VAT invoice for every sale
Sell goods at different VAT rates (standard, reduced, zero-rated)

You cannot use a retail scheme for:

Sales to VAT-registered businesses (issue VAT invoices instead)
Mail order or distance selling (unless using Point of Sale scheme)
Supplies where you must issue a VAT invoice by law

Choosing the right retail scheme

The best scheme depends on your systems, turnover, and product mix:

VAT retail schemes for calculating output tax

Special schemes for retailers to calculate VAT when making many sales to the public.

Retail schemes

Retail schemes allow businesses making many sales to the general public to calculate VAT without recording VAT on each sale. They work back from daily gross takings.

Point of Sale scheme: Use EPOS to record VAT rate of each sale - most accurate
Apportionment Scheme 1: Apportion sales by VAT liability of purchases (for mixed-rate goods)
Apportionment Scheme 2: Apportion by marking goods at expected selling price
Direct Calculation Scheme 1: Calculate standard-rated sales from expected selling prices of purchases
Direct Calculation Scheme 2: Use daily takings and expected margins
Annual turnover limit: Most schemes require turnover under GBP 130 million
Eligibility: Must make retail sales (supplies to final consumers)
Records required: Daily gross takings records, purchase records by VAT rate

VAT retail schemes

Point of Sale scheme

If you have an EPOS (electronic point of sale) system or barcode scanning, the Point of Sale scheme is usually the most accurate. Your till records which VAT rate applies to each item, so you can calculate VAT precisely from your daily totals.

Advantages:

Most accurate VAT calculation
No turnover limit
Works well for high-volume retailers with modern systems

Apportionment schemes

If you cannot identify VAT rates at point of sale, apportionment schemes work back from your purchases. You calculate what proportion of your purchases were at each VAT rate, then apply those proportions to your sales.

Scheme 1 (turnover up to £1 million): Uses purchase costs to calculate the proportion.

Scheme 2 (turnover up to £130 million): Uses expected selling prices of purchases - more accurate if your mark-ups vary between product categories.

Direct Calculation schemes

If most of your sales are at one VAT rate with only a minority at another rate, Direct Calculation schemes may be simpler. You identify and record the minority sales, then calculate the majority by deduction.

Scheme 1 (turnover up to £1 million): Identify minority goods at point of sale.

Scheme 2 (turnover up to £130 million): Calculate minority goods sales from expected selling prices of purchases.

Invoice requirements for retail sales

For most retail sales to consumers, you do not need to issue a VAT invoice. However, if a customer asks for one (for example, if they are VAT-registered and buying for business use), you must provide it.

Simplified VAT invoice requirements

Reduced requirements for VAT invoices where the total value including VAT is £250 or less.

Threshold for simplified invoice: Total value including VAT must be £250 or less
1. Supplier's name: Trading name or registered company name
2. Supplier's address: Full business address
3. Supplier's VAT registration number: 9-digit GB VAT number
4. Date of supply (tax point): Date goods were delivered or services completed
5. Description of goods or services: Sufficient detail to identify what was supplied
6. Total amount payable including VAT: Gross total including VAT
7. For each VAT rate: Either the rate of VAT charged OR the amount of VAT charged (for zero-rated items state the rate as 0%)

Key differences from full invoice: No sequential invoice number required. No customer name or address required. No separate net and VAT totals required. Simplified invoices cannot be used for sales to VAT-registered businesses who need full invoices to reclaim input tax.

Retail supplies exception: Retailers can issue simplified invoices for any retail sale up to £250 regardless of customer status
Customer request: Must issue full VAT invoice if customer requests one, even for supplies under £250

When customers request VAT invoices

Some customers may need a VAT invoice to reclaim VAT on their purchase. Common situations include:

Trade customers buying supplies for their business
Employees buying equipment they will be reimbursed for
Self-employed people buying business supplies

If a VAT-registered customer requests a full VAT invoice for a purchase over £250, you must provide one with all 14 required elements. For sales under £250, a simplified invoice is sufficient unless the customer specifically requests a full invoice.

Modified VAT invoices: Retailers often use modified invoices which show VAT-inclusive prices per item rather than VAT-exclusive. This is permitted as long as you include all the other required information and clearly show the total VAT charged.

Gift vouchers and gift cards

If you sell gift vouchers or gift cards, the VAT treatment depends on whether the voucher is 'single-purpose' or 'multi-purpose'. Getting this wrong can mean accounting for VAT at the wrong time.

VAT treatment of gift vouchers and gift cards

VAT rules for single-purpose vouchers, multi-purpose vouchers, and face-value vouchers in retail.

Single-purpose vs multi-purpose vouchers

The VAT treatment of gift vouchers depends on whether the goods or services that can be purchased are known at the time the voucher is issued.

Single-purpose voucher (SPV): VAT rate and place of supply are known at issue - VAT due when voucher sold
Multi-purpose voucher (MPV): VAT rate or place of supply unknown at issue - VAT due when voucher redeemed
SPV example: Restaurant gift card (always standard-rated food service) - VAT on sale
MPV example: Department store gift card (mixed zero and standard-rated goods) - VAT on redemption
Face-value vouchers: Sold at face value and exchangeable for goods/services - follow SPV/MPV rules
Discount vouchers: Reduce consideration paid - VAT calculated on discounted price
Money-off coupons: Third-party funded - complex rules, may need apportionment
Effective date of rules: SPV/MPV rules apply from 1 January 2019

How to identify your voucher type

Ask yourself: when someone buys this voucher, do I know exactly what VAT rate will apply when they redeem it?

Single-purpose voucher examples:

A restaurant gift card - always standard-rated catering
A gift card for a specific product range that is all standard-rated
A voucher for a specific service at a known VAT rate

Multi-purpose voucher examples:

A department store gift card - could buy zero-rated children's clothes or standard-rated homeware
A supermarket gift card - mix of zero-rated food and standard-rated goods
A shopping centre gift card - redeemable at different shops with different product mixes

Third-party vouchers: If you sell gift vouchers issued by another retailer, you are usually not making a supply for VAT purposes - you are acting as an agent. The issuer accounts for VAT. Check your agreement with the voucher provider.

Handling returns and refunds

When customers return goods, you need to adjust your VAT records. The adjustment depends on whether you give a full refund, partial refund, or exchange.

VAT treatment of returns and refunds

How to account for VAT when customers return goods or receive refunds.

Adjusting VAT on returns

When goods are returned and a refund is issued, you must adjust your VAT records to reflect the reduced consideration.

Full refund: Reduce output VAT by the VAT element of the refund
Partial refund: Adjust output VAT proportionally to the refund amount
Credit notes: Issue credit note showing VAT adjustment for B2B refunds
When to account: In the VAT period when the refund is made
Refund of deposit: If deposit was subject to VAT, refund includes VAT element
Goodwill payments: If no goods returned, no VAT adjustment (unless linked to original supply)
Exchange for different goods: Account as return plus new sale at respective VAT rates
Record keeping: Keep records of returns, credit notes, and VAT adjustments

Practical return scenarios

Full refund: Reduce your output VAT by the VAT element of the original sale. If you sold a £120 item (including £20 VAT) and refund the full amount, reduce your output VAT by £20.

Partial refund or price adjustment: If you give a partial refund (for example, keeping a restocking fee), calculate the VAT element of the amount actually refunded.

Exchange for different goods: Account for this as a return of the original item (reduce output VAT) plus a new sale of the replacement item (charge output VAT at the applicable rate for the new item).

Goodwill payments: If you give a customer a cash payment as compensation (not linked to returning goods), this is not a VAT adjustment. It is a business expense for you, not a reduction in the original supply.

Loyalty schemes and reward programmes

If you operate a loyalty scheme, the VAT treatment depends on how the points work - whether they represent a discount on future purchases or something else.

VAT on loyalty schemes and cashback

VAT treatment of loyalty points, cashback, and reward programmes in retail.

Loyalty points and rewards

The VAT treatment of loyalty schemes depends on whether points represent a discount on future purchases or a separate supply.

Points as discount: If points reduce price paid, VAT is on discounted amount at redemption
Third-party funded points: Complex - may require apportionment between retailer and scheme operator
Cashback: If unconditional cash payment, not subject to VAT (not consideration for supply)
Manufacturer cashback: Customer claims from manufacturer - reduces consideration to manufacturer, not retailer
Points for goods/services: VAT due on value of goods/services supplied when points redeemed
Multi-purpose loyalty cards: Follow MPV rules if can be redeemed at multiple retailers for mixed supplies
Stamp cards: Free item after X purchases - VAT included in earlier purchases, none on free item

Practical loyalty scheme examples

Stamp cards (buy 9, get 10th free): The customer pays full price including VAT for the first 9 purchases. The 10th item is free - you do not account for output VAT on it because there is no consideration. The VAT collected on the first 9 items is your output tax.

Points reducing future purchases: When a customer uses points to reduce what they pay, you account for VAT on the amount they actually pay. If they buy a £50 item but use £10 of points, you account for VAT on £40.

Multi-retailer schemes: If your scheme is part of a larger coalition (like Nectar or Clubcard), the VAT treatment depends on your agreement with the scheme operator. Usually, you treat the points as a discount funded partly by the scheme operator, with complex apportionment rules.

Manufacturer-funded loyalty: If a manufacturer funds the reward (for example, cashback offers), the VAT adjustment is between the customer and the manufacturer, not you. You account for VAT on the full price the customer paid you.

Second-hand goods margin scheme

If you sell second-hand goods, antiques, works of art, or collectors' items, you may be able to use the margin scheme. This means you only pay VAT on your profit margin, not the full selling price.

VAT margin scheme for second-hand goods

Special VAT accounting for second-hand goods, antiques, works of art, and collectors' items.

Second-hand goods margin scheme

The margin scheme allows VAT to be calculated only on the profit margin rather than the full selling price, reducing the VAT payable on eligible second-hand goods.

Eligible goods: Second-hand goods, works of art, antiques, collectors' items
Eligibility condition: Goods must have been bought from individuals or margin scheme dealers (no VAT invoiced)
Margin calculation: Selling price minus purchase price = margin (VAT calculated on margin)
VAT fraction: VAT is 1/6th of the positive margin (standard rate)
Negative margin: If selling price lower than purchase price, no VAT due on that item
Global accounting option: Calculate margin on total purchases and sales in VAT period
Records required: Stock book showing purchase details, supplier, and selling price
Invoicing: Do not show VAT separately on margin scheme invoices
Purchases from VAT-registered businesses: Cannot use margin scheme if VAT invoice received for purchase

VAT margin schemes

Who can use the margin scheme?

You can use the margin scheme if you bought the goods from:

Private individuals (not VAT-registered)
Another business that sold using the margin scheme (and did not show VAT separately)
A business where the goods were exempt from VAT

You cannot use the margin scheme if:

You received a VAT invoice showing VAT separately
You imported the goods and paid import VAT
The goods are new (not previously used)

Record keeping for margin scheme

You must keep a stock book recording:

Stock number for each item
Date of purchase
Description of the goods
Purchase price
Name and address of seller
Date of sale
Selling price
Invoice number (if applicable)

Global accounting: Instead of calculating margin per item, you can use 'global accounting' to calculate your total margin for the VAT period. This is simpler but only works well if your margins are consistent.

Common retail VAT mistakes

HMRC regularly identifies these errors in retail VAT compliance:

Using the wrong retail scheme - check you meet the turnover and other conditions for your chosen scheme
Mixing retail and non-retail sales - if you sell to trade customers, you cannot include those sales in a retail scheme. Issue proper VAT invoices instead
Incorrect voucher accounting - make sure you know whether your vouchers are single-purpose or multi-purpose
Not adjusting for returns - if you use a retail scheme, include returns in your daily gross takings adjustment
Wrong VAT rate on food - the rules on what food is zero-rated are complex. Hot food and catering are standard-rated; most cold food is zero-rated
Displaying VAT-exclusive prices to consumers - all consumer-facing prices must include VAT

What to do next

If you are setting up VAT for a retail business:

Check if you need to register - monitor your taxable turnover against the threshold
Choose your retail scheme - select the scheme that matches your systems and turnover
Set up your EPOS - configure your till or point of sale system to track VAT rates if using Point of Sale scheme
Review your pricing - ensure all consumer-facing prices include VAT
Update your voucher accounting - identify which vouchers are single-purpose and which are multi-purpose
Set up proper records - maintain daily gross takings records and any scheme-specific records

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VAT for retail businesses

When you must register for VAT

Retail-specific considerations

Price display requirements

Practical pricing tips

Selling goods at different VAT rates

Common retail mixed supply situations

VAT retail schemes

Choosing the right retail scheme

Point of Sale scheme

Apportionment schemes

Direct Calculation schemes

Invoice requirements for retail sales

When customers request VAT invoices

Gift vouchers and gift cards

How to identify your voucher type

Handling returns and refunds

Practical return scenarios

Loyalty schemes and reward programmes

Practical loyalty scheme examples

Second-hand goods margin scheme

Who can use the margin scheme?

Record keeping for margin scheme

Common retail VAT mistakes

What to do next

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When you must register for VAT

Retail-specific considerations

Price display requirements

Practical pricing tips

Selling goods at different VAT rates

Common retail mixed supply situations

VAT retail schemes

Choosing the right retail scheme

Point of Sale scheme

Apportionment schemes

Direct Calculation schemes

Invoice requirements for retail sales

When customers request VAT invoices

Gift vouchers and gift cards

How to identify your voucher type

Handling returns and refunds

Practical return scenarios

Loyalty schemes and reward programmes

Practical loyalty scheme examples

Second-hand goods margin scheme

Who can use the margin scheme?

Record keeping for margin scheme

Common retail VAT mistakes

What to do next

Related guides in VAT Rates & Exemptions

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