Use a VAT retail scheme

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.

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.

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.

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.

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.

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.

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.

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
• Use a scheme for at least 12 months before changing, unless you become ineligible or HMRC permits or requires an earlier change
• Keep records of which scheme you used and when you changed

Exceeding turnover limits: If your turnover makes you ineligible, continue using the current scheme through the end of the next complete accounting period, then move to a scheme with a higher limit or no limit.

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.

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.