If you sell mainly to the general public and cannot issue a VAT invoice for every sale, a VAT retail scheme lets you calculate your VAT liability from your total takings rather than tracking VAT on each individual transaction.

Retail schemes are designed for businesses where issuing individual VAT invoices is impractical - such as shops, market stalls, and other retailers selling directly to consumers who cannot reclaim VAT.

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

Who can use retail schemes

You can use a VAT retail scheme if you:

Make sales direct to the general 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 if you:

Use the VAT Flat Rate Scheme - you must use the flat rate percentage instead
Make all your sales to VAT-registered businesses (issue VAT invoices instead)
Only sell goods at a single VAT rate (standard accounting is straightforward)

Important: When you sell to VAT-registered businesses, you must issue a VAT invoice regardless of which retail scheme you use. Retail schemes only apply to sales where invoicing is impractical.

Point of Sale scheme

The Point of Sale scheme is the most accurate retail scheme because it identifies the VAT rate on each item at the time of sale. It requires suitable technology or systems to work effectively.

VAT Point of Sale retail scheme

The Point of Sale scheme for identifying VAT at the time of each sale using till programming or price marking.

The Point of Sale scheme identifies the VAT rate applicable to each item at the time of sale. It is the most accurate retail scheme but requires suitable equipment or systems.

How it works: VAT identified at time of sale using EPOS, barcodes, or price marking
Turnover limit: No limit - can be used by any size of business
Best suited for: Businesses with electronic point of sale (EPOS) systems or barcode scanning
Accuracy: Most accurate scheme as VAT is identified per item

Methods of identification

EPOS systems: Till programmed to identify VAT rate per product
Barcode scanning: Product database holds VAT rate information
Price marking: Different coloured price labels for different VAT rates
Department keys: Different till keys for standard-rated, zero-rated, etc.

Daily gross takings: Record total takings split by VAT rate (standard, reduced, zero, exempt)
VAT calculation: Apply VAT fraction (1/6 for 20%) to standard-rated takings
Key advantage: Precise VAT calculation - no estimation or sampling required
Key disadvantage: Requires investment in systems and staff training

When to use Point of Sale

This scheme works best if you:

Have an electronic point of sale (EPOS) system that can track VAT rates per product
Use barcode scanning linked to a product database with VAT information
Can programme separate till keys for different VAT rates
Want the most accurate VAT calculation with no estimation

There is no turnover limit for the Point of Sale scheme, making it suitable for businesses of any size.

Apportionment schemes

Apportionment schemes calculate VAT based on the proportion of your purchases at each VAT rate. They assume your sales mix roughly mirrors your purchase mix.

There are two versions with different turnover limits and calculation methods.

Apportionment Scheme 1

This scheme uses the cost price of purchases to calculate the apportionment ratio. It is simpler but less accurate if your mark-ups vary between product categories.

VAT Apportionment Scheme 1

Apportionment retail scheme based on the ratio of purchases at each VAT rate, suitable for smaller retailers.

Apportionment Scheme 1 calculates VAT based on the proportion of goods purchased at each VAT rate. It assumes your sales mix mirrors your purchase mix.

How it works: Calculate ratio of purchases at each VAT rate, apply to total sales
Turnover limit: £1 million per year (excluding VAT)
Best suited for: Smaller retailers with consistent purchase-to-sales ratios
Calculation basis: Uses purchase figures (cost price) to apportion sales

Calculation method

Record all purchases at each VAT rate (standard, reduced, zero-rated)
Calculate the percentage of total purchases at each rate
Apply these percentages to your daily gross takings
Calculate VAT due on the standard-rated portion using VAT fraction (1/6)

Example

If 60% of purchases are standard-rated and 40% zero-rated:

Total takings: £10,000
Standard-rated portion: £6,000 (60%)
VAT due: £1,000 (£6,000 x 1/6)

Annual adjustment: Required - recalculate at year end based on actual annual purchases
Key advantage: Simple calculation using purchase records you already keep
Key disadvantage: Inaccurate if mark-ups differ significantly between VAT rate categories

When to use Apportionment Scheme 1

This scheme suits your business if:

Your annual turnover is under £1 million (excluding VAT)
You apply similar mark-ups across all product categories
You want a simple calculation based on purchase records you already keep

Limitation: If you apply higher mark-ups to zero-rated goods than standard-rated goods (or vice versa), this scheme will not accurately reflect your actual VAT liability.

Apportionment Scheme 2

This scheme uses expected selling prices instead of cost prices, making it more accurate when mark-ups vary between categories.

VAT Apportionment Scheme 2

Apportionment retail scheme using expected selling prices rather than purchase costs, suitable for medium-sized retailers.

Apportionment Scheme 2 calculates the apportionment ratio using the expected selling prices of goods purchased, rather than their cost. This gives a more accurate result when mark-ups vary between product categories.

How it works: Calculate ratio using expected selling prices of purchases at each VAT rate
Turnover limit: £130 million per year (excluding VAT)
Best suited for: Larger retailers where mark-ups vary between standard and zero-rated goods
Calculation basis: Uses expected selling price (ESP) of purchases

Calculation method

For each purchase, calculate the expected selling price (ESP)
Record ESPs split by VAT rate (standard, reduced, zero-rated)
Calculate the percentage of total ESPs at each VAT rate
Apply these percentages to daily gross takings
Calculate VAT due on the standard-rated portion

Expected selling price

The ESP is the price you expect to sell goods for, including any mark-up. If you use different mark-ups for different product categories, Scheme 2 gives a more accurate VAT calculation than Scheme 1.

Annual adjustment: Required - recalculate based on actual annual figures
Key advantage: More accurate than Scheme 1 when mark-ups vary between categories
Key disadvantage: More complex record keeping - must track expected selling prices

When to use Apportionment Scheme 2

This scheme suits your business if:

Your annual turnover is under £130 million (excluding VAT)
You apply different mark-ups to different product categories
You can calculate expected selling prices for purchases
You need more accuracy than Scheme 1 provides

Example: A convenience store might apply a 50% mark-up on confectionery (standard-rated) but only 20% on newspapers (zero-rated). Scheme 2 accounts for this difference; Scheme 1 does not.

Direct Calculation schemes

Direct Calculation schemes work by identifying sales of your minority goods (the smaller category by value) and calculating the majority by deduction from total takings.

These schemes are efficient when most of your sales are at one VAT rate with relatively few exceptions.

Direct Calculation Scheme 1

This scheme identifies minority goods at the point of sale, then calculates majority goods by deducting minority sales from total takings.

VAT Direct Calculation Scheme 1

Direct Calculation retail scheme identifying minority goods at point of sale, suitable when most sales are at one VAT rate.

Direct Calculation Scheme 1 works by identifying sales of minority goods (the smaller category) at the point of sale. The majority goods are calculated by deducting minority sales from total takings.

How it works: Identify minority goods at sale, calculate majority by deduction
Turnover limit: £1 million per year (excluding VAT)
Best suited for: Retailers where most sales are at one VAT rate with few exceptions
Minority goods: The smaller category by value (usually zero-rated in standard-rate businesses)

Calculation method

Record total daily gross takings (DGT)
Identify and record sales of minority goods at point of sale
Calculate majority goods by deduction: DGT minus minority sales
Apply VAT fraction to majority goods (if standard-rated)

Example

A newsagent where most sales are standard-rated (confectionery, magazines) but some are zero-rated (newspapers, some food):

Identify zero-rated sales (minority) at point of sale
Deduct from total takings to find standard-rated sales
Calculate VAT on the standard-rated portion

Minority goods limit: Must be genuinely the smaller category by sales value
Key advantage: Only need to identify a subset of sales at point of sale
Key disadvantage: Requires accurate identification of all minority goods sales

When to use Direct Calculation Scheme 1

This scheme suits your business if:

Your annual turnover is under £1 million (excluding VAT)
Most sales are at one VAT rate (e.g., mainly standard-rated with some zero-rated)
You can easily identify minority goods at point of sale
The minority category is genuinely small by sales value

Example: A newsagent selling mainly standard-rated items (magazines, confectionery) with some zero-rated newspapers. Identify newspaper sales separately; the rest is standard-rated.

Direct Calculation Scheme 2

This scheme calculates minority goods sales using expected selling prices of purchases, rather than identifying them at point of sale.

VAT Direct Calculation Scheme 2

Direct Calculation retail scheme using expected selling prices for minority goods, suitable for larger retailers.

Direct Calculation Scheme 2 calculates minority goods sales using expected selling prices of purchases, rather than identifying them at point of sale. This is combined with annual adjustment for accuracy.

How it works: Calculate minority goods sales using expected selling prices of purchases
Turnover limit: £130 million per year (excluding VAT)
Best suited for: Larger retailers who cannot easily identify minority goods at point of sale
Calculation basis: Uses expected selling price (ESP) of minority goods purchased

Calculation method

For minority goods purchases, calculate expected selling price (ESP)
Use total ESP of minority goods as estimate of minority sales
Deduct from daily gross takings to find majority goods sales
Apply VAT fraction to appropriate category
Perform annual adjustment based on actual stock changes

Annual adjustment: Required - must adjust for opening and closing stock
Stock count requirement: Annual stock count of minority goods required for adjustment
Key advantage: No need to identify minority goods at point of sale
Key disadvantage: Requires accurate stock records and annual counting

When to use Direct Calculation Scheme 2

This scheme suits your business if:

Your annual turnover is under £130 million (excluding VAT)
Most sales are at one VAT rate
You cannot easily identify minority goods at point of sale
You can maintain accurate stock records for minority goods

This scheme requires annual stock counts of minority goods to calculate adjustments, so is more administratively demanding than Scheme 1.

Choosing the right scheme

The right retail scheme depends on your turnover, available systems, product mix, and the accuracy you need.

Choosing the right VAT retail scheme

Guidance on selecting the most appropriate VAT retail scheme based on business turnover, systems, and product mix.

Choosing the right VAT retail scheme depends on your turnover, the systems you have, and how your product mix varies by VAT rate. The table below summarises when each scheme is most appropriate.

Point of Sale: Best if you have EPOS or can identify VAT rate at each sale. No turnover limit.
Apportionment 1: Best for smaller retailers (under £1m) with consistent mark-ups across categories.
Apportionment 2: Best for larger retailers (under £130m) where mark-ups vary between VAT categories.
Direct Calculation 1: Best for smaller retailers (under £1m) where most sales are at one VAT rate.
Direct Calculation 2: Best for larger retailers (under £130m) with majority at one rate, cannot identify minority at sale.

Key decision factors

Turnover: Schemes 1 (Apportionment and Direct Calculation) have £1m limit
Systems: Point of Sale requires EPOS or barcode capability
Mark-ups: If mark-ups vary, use ESP-based schemes (Apportionment 2, Direct Calculation 2)
Product mix: If mostly one VAT rate, Direct Calculation schemes are simpler
Record keeping: Consider what records you already maintain

Changing schemes

You can change retail schemes but must:

Complete any required annual adjustment for the old scheme
Start the new scheme from the beginning of a VAT period
Ensure you meet the conditions for the new scheme

Assess your systems capability

If you have EPOS or barcode scanning that can identify VAT rates per product, the Point of Sale scheme gives the most accurate results. If not, consider apportionment or direct calculation.
Check the turnover limits

Schemes 1 (Apportionment and Direct Calculation) have a £1 million limit. Schemes 2 have a £130 million limit. Point of Sale has no limit. Choose a scheme you will not quickly outgrow.
Analyse your product mix

If sales are fairly evenly split between VAT rates, apportionment schemes work well. If most sales are at one rate with few exceptions, direct calculation is more efficient.
Consider your mark-up patterns

If mark-ups are consistent across categories, Scheme 1 variants are simpler. If mark-ups vary significantly, Scheme 2 variants using expected selling prices are more accurate.
Review your existing records

Choose a scheme that aligns with records you already keep. Switching to a scheme requiring new record types adds administrative burden.

Changing retail schemes

You can change your retail scheme, but must follow the correct process:

Complete any required annual adjustment for your current scheme before changing
Start the new scheme from the beginning of a VAT period, not mid-period
Ensure you meet the eligibility conditions for the new scheme
Keep records of which scheme you used and when you changed

Exceeding turnover limits: If your turnover exceeds the limit for your current scheme, you must change to a scheme with a higher limit (or no limit) from the start of the next VAT period after you exceed the threshold.

Bespoke schemes

If none of the standard schemes suits your business circumstances, you can apply to HMRC for a bespoke retail scheme. This requires written agreement and must demonstrate that standard schemes would produce unfair or impractical results for your business.

Record keeping requirements

All retail schemes require specific records that HMRC can inspect. Poor record keeping can result in HMRC rejecting your scheme calculations and assessing VAT based on their own estimates.

VAT retail scheme record keeping requirements

Mandatory records for VAT retail schemes including daily takings, purchases, and annual adjustments.

All VAT retail schemes require specific records to be maintained. These must be kept for at least 6 years and be available for HMRC inspection.

Retention period: Minimum 6 years from end of accounting period
Daily gross takings (DGT): Required for all schemes - total takings including VAT
Purchase records: Required for apportionment schemes - split by VAT rate
Expected selling prices: Required for Scheme 2 variants - ESP records for purchases
Annual adjustment calculation: Required for schemes with annual adjustment

Records for all schemes

Daily gross takings (DGT) from all sources
Adjustments for credit notes, refunds, discounts
VAT account showing output tax calculated
VAT invoices issued (for sales to VAT-registered customers)

Additional records by scheme

Point of Sale: Till records showing split by VAT rate
Apportionment 1: Purchase invoices analysed by VAT rate
Apportionment 2: ESP calculations for purchases
Direct Calculation 1: Records of minority goods sales
Direct Calculation 2: ESP records and annual stock counts

Stock records: Required for Direct Calculation 2 - opening and closing minority stock
ESP calculations: Must show method used and be applied consistently
Annual adjustment workings: Full calculation showing how adjustment was derived
Scheme selection record: Document which scheme you use and why it is appropriate

Key record keeping principles

Retention: Keep all records for at least 6 years from the end of the accounting period
Consistency: Use the same calculation method throughout each accounting period
Documentation: Record which scheme you use and document your calculation method
Annual adjustments: Keep full workings showing how you calculated any year-end adjustments

VAT invoices: Remember that retail schemes only apply to sales where you do not issue VAT invoices. You must still issue proper VAT invoices for sales to VAT-registered businesses and keep copies as normal.

RETAIL & CONSUMER GOODS Requirement

If your business includes both retail sales (to the public) and trade sales (to other businesses), you need to handle these differently:

Retail sales: Use your chosen retail scheme to calculate VAT from total takings
Trade sales: Issue VAT invoices and account for VAT on each invoice as normal

Keep clear records separating retail and trade sales. Your daily gross takings for the retail scheme should exclude any sales where you issued a VAT invoice.

Who this applies to: Retailers who also make business-to-business sales

VAT retail schemes

Business Context Testing

Content Graph

Guvnor

Use a VAT retail scheme

Who can use retail schemes

Point of Sale scheme

When to use Point of Sale

Apportionment schemes

Apportionment Scheme 1

When to use Apportionment Scheme 1

Apportionment Scheme 2

When to use Apportionment Scheme 2

Direct Calculation schemes

Direct Calculation Scheme 1

When to use Direct Calculation Scheme 1

Direct Calculation Scheme 2

When to use Direct Calculation Scheme 2

Choosing the right scheme

Assess your systems capability

Check the turnover limits

Analyse your product mix

Consider your mark-up patterns

Review your existing records

Changing retail schemes

Bespoke schemes

Record keeping requirements

Key record keeping principles

Mixed retail businesses

Compliance Assistant

🧪 Business Context Testing

◉ Content Graph

Who can use retail schemes

Point of Sale scheme

When to use Point of Sale

Apportionment schemes

Apportionment Scheme 1

When to use Apportionment Scheme 1

Apportionment Scheme 2

When to use Apportionment Scheme 2

Direct Calculation schemes

Direct Calculation Scheme 1

When to use Direct Calculation Scheme 1

Direct Calculation Scheme 2

When to use Direct Calculation Scheme 2

Choosing the right scheme

Assess your systems capability

Check the turnover limits

Analyse your product mix

Consider your mark-up patterns

Review your existing records

Changing retail schemes

Bespoke schemes

Record keeping requirements

Key record keeping principles

Mixed retail businesses

Related guides in VAT Returns

Business Context Testing

Content Graph