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A look at the various retail schemes that have been introduced to ease the production of VAT returns for businesses that work within this sector

Part 1 of this series, issued here in June, covered how to deal with monthly and annual VAT returns and also the flat rate scheme. 

Part 2 of this series of VAT articles covers the main schemes that apply in the retail industry. It should be noted that the TOMS scheme is one of the most complex schemes available and anyone who wishes to become involved in this area should ensure they are fully familiar with all aspects of the scheme.


The VAT Retail Scheme                     

Where a retail business sells direct to the public, it may find it difficult to issue a VAT invoice for each sale. Such examples are small corner shops where many transactions are for less than £1, but which will include VAT. It is not normal for such a small shop to issue a VAT receipt for each sale and is time-consuming to record each sale separately to show the VAT in all its glorious detail. The VAT Retail Scheme has been set up to allow a simpler recording of VAT in such circumstances. VAT Notice 727 covers the basics of the VAT Retail scheme.

There are actually five schemes and retailers should use the most appropriate to arrive at the value of taxable retail sales and determine the proportions that are taxable at the different rates of VAT. Each scheme has a turnover limit. Due to the turnover limits,  this article will only cover three of these schemes, that apply to ‘small’ retailers.

Businesses do not need to apply to use a retail scheme but should start to use one at the beginning of a tax period. Note that if a business operates both retail and non-retail transactions then the retail scheme can only be used for that part of the business, the non-retail section must use the normal method of showing VAT (or use one of the other applicable schemes). The business can leave the scheme at the end of any VAT period, but if turnover rises above £130 million, then it will have to leave the scheme.

Under the scheme, sales to other VAT registered businesses must be accompanied by a VAT receipt and if a customer requests a VAT receipt, one must be provided.

The retail scheme can be used in conjunction with the cash accounting scheme and the annual accounting scheme, both of which were covered in Part 1 of this series of articles.

The main benefits of these schemes are that:

  • they provide an alternative to standard VAT accounting rules, which might be difficult or costly  to follow
  • VAT invoices will not have to be issued unless they are requested.

Note: there are separate rules if the business is a caterer, pharmacist or florist.

 

Point of sale scheme

This scheme can be used if the business uses a till to distinguish the sales at each rate of VAT, or uses different tills for each rate of VAT. This means using an electronic till system and is the scheme that must be used if the only rates of VAT are standard and reduced rate.

Quite often the figures are recorded as a daily total (sometimes referred to as a z-total) and extracted from the till as a print-out.

Example

The following gross sales are recorded for a single day:

 

 

Daily Gross Takings

VAT included

Net sales

standard rate (20%)

960.00

160.00

800.00

Reduced rate (5%)

714.00

  34.00

680.00

VAT due for the day

1674.00

194.00

1480.00

 

If the till has not split out the VAT but simply shows the gross takings for each VAT rate, you can then calculate the output tax, and hence net sales, by apportioning the VAT fraction of the relevant portion of the daily gross takings (DGT). A record of DGT must be kept each day although the VAT may be calculated weekly.

The transactions can be recorded as normal, with net and VAT amounts being posted to the sales and VAT accounts daily or weekly (say), or they can be recorded gross with a VAT adjustment carried out at the end of the quarter.

The VAT on inputs will be calculated in the normal way and hence the final VAT due can be calculated as with any other standard or cash-based scheme.

Further information can be found in VAT Notice 727/3.

 

The Apportionment Scheme

A business cannot use the apportionment scheme if its turnover, excluding VAT, is over £1 million. There is a separate scheme for businesses with turnover above this level, but we are not considering that in this article.

This scheme can only be used if the business buys goods for resale. It does not cover businesses that produce or grow their own goods for sale, are in catering, or provide a service. The main difference between this scheme and the point of sale scheme is that, whereas the POS scheme is based on sales, the apportionment scheme is based on the value of goods purchased for resale. It can therefore be used where it is not possible to calculate the amount of VAT from the gross daily takings.

The overall VAT liability on the purchase and sale of goods is calculated by comparing the value of purchases at each VAT rate against the total value of gross sales and calculating the VAT liability accordingly.

 

Example

The following figures are extracted from the source documents for a single VAT quarter.

Total purchases: £27,000 (net of VAT), split by VAT rates as follows:

  • 16,000 of goods at 20%
  • £1,000 at 5%
  • £10,000 at zero rate

Total sales: £33,600.

Due to the nature of the till used in the shop, it is not possible to calculate the various rates of VAT that have been applied to those sales hence the POS scheme will not work.

 

Step 1

To make the calculation, take each purchases figure in turn that has been subject to VAT and divide by the total purchases. Note: ignore the zero-rated items as no VAT is included in this figure.

 

£

Goods at 20%

16,000 / 27,000

Goods at 5%

  1,000 / 27,000

 

Checking the calculations - to rationalise why this works, if you take the same calculation for each of the three levels of VAT and multiply by 100 this would give the purchases at each level of VAT as a percentage of the total purchases i.e. an apportionment of each level against the total.

Checking this out and including the zero rate purchases would give:

 

£

Goods at 20%

16,000 / 27,000 x 100 =  59.3%

Goods at 5%

  1,000 / 27,000 x 100 =    3.7%

Zero rated goods

10,000 / 27,000 x 100 =  37.0%

Total percentage

59.3 + 3.7 + 37.0 = 100%

 

Step 2

Ignoring the zero-rated purchases, multiply each of the figures gained in step 1 by the gross value of quarterly takings to find the gross amount of apportioned purchases at each level of VAT.

 

£

Goods at 20%

16,000 / 27,000 x 33,600 = 19,911.11

Goods at 5%

  1,000 / 27,000 x 33,600 =   1,244.44

 

Step 3

Finally, divide each by the relevant VAT fraction (6 for standard rate and 21 for reduced rate). To calculate the total amount of VAT due for the quarter (note as with all VAT round the amount down).

 

£

Goods at 20%

19,911.11 / 6 = 3,318.51

Goods at 5%

   1,244.44 / 21 = 59.25

 

The total VAT liability due to HMRC for the quarter will  be £3,377.76

Further information can be found in VAT Notice 727/4.

 

The Direct Calculation Scheme

This is probably the most complex of the three schemes to get right as it involves estimating levels of sale at each VAT rate. It can prove costly if those estimation calculations turn out to be wrong. The same turnover rules apply to this scheme as to the apportionment scheme, but this scheme can include the sale of goods that you have made or grown.

This scheme might be suitable if the business is not able to exactly separate out the sales at each level of VAT (because it does not have an electronic till so cannot use the POS scheme) but it must be able to estimate this as accurately as possible in order to produce VAT figures that are as close to exact as possible.

This scheme is best used if the business makes a small proportion of its sales at one (or more than one) VAT rate (called minority goods) and the majority at another. If only one rate of VAT is included, then the POS scheme must be used.

An example of this would be where 70% of sales are estimated to be standard rated and 30% are zero-rated. The zero-rated sales would therefore be the minority sales and the standard rates sales the majority sales.

In this case, you would simply calculate the output VAT based on 70% of your total sales multiplied by the VAT fraction for standard rated sales (1/6).

Example

Given gross sales over the period as £14,560. From experience, it is estimated that of all sales, 40% will be minority sales with the remainder as majority sales at standard rate. The estimated split on sales would therefore be:

 

Gross Takings

Estimated sales split by VAT rates

Total sales

14,560.00

 

Estimated zero-rated sales

 

5,824.00

Standard rate (20%) (the balance)

 

8,376.00

 

These estimated amounts are ‘taken away’ from the gross sales to estimate the amount of sales at standard rate. 

The VAT included in the standard sales can now be calculated by applying the VAT fraction.

 

 

Gross Takings (from till)

Estimated takings split by VAT rates

VAT included in estimated takings

Total sales

14,560.00

 

 

Zero-rated sales

 

5,284.00

0.00

Standard rate (20%)

 

8,376.00

1,396.00

 

The total output VAT for the period would be £1,396.00

Example 

If the sales cover more than two rates of VAT, then the calculation is slightly more complex as you cannot identify a single minority sale. You will have to split the total sales into estimated sales for each level and carry out a more complex calculation.

Given gross sales over the period as £14,560. From experience, it is estimated that those sales will  be split by different VAT rates as follows:

 

Gross Takings

Estimated sales split by VAT rates

Total sales

14,560.00

 

Zero-rated sales

 

2,500.00

Reduced rate (5%)

 

1,575.00

Standard rate (20%) (the balance)

 

10,485.00

 

Note the zero-rated and reduced rate sales together still form a  very small percentage of total sales. Both of these estimated amounts are ‘taken away’ from the gross sales to estimate the amount of sales at standard rate.

The same calculation for VAT can now be carried out as above,  this time using the two VAT fractions.

 

 

Gross Takings (from till)

Estimated takings split by VAT rates

VAT included in estimated takings

Total sales

14,560.00

 

 

Zero-rated sales

 

2,500.00

0.00

Reduced rate (5%)

 

1,575.00

75.00

Standard rate (20%)

 

10,485.00

1,747.50

 

Total VAT due on sales will be £1,822.50

Note: any sales made to other VAT registered businesses must be accompanied by a VAT invoice (which may, if it is within the rules, be a less detailed VAT invoice), and treated as a normal VAT sale, outside of this calculation.

Care should be taken if deciding to use this method,

For further details on the retail schemes look at the HMRC booklet 727/5.

The Margin Scheme for Secondhand Goods, Works Of Art, Antiques and Collectors' Items

If a business sells second-hand goods (such as cars, works of art, antiques or collectors' items), under certain circumstances, the accounting for VAT is based on the difference between the purchase price and the selling price, rather than the full value of the sale. Use of the scheme is optional.

For example, when businesses deal in secondhand goods, they often buy from members of the public who are not VAT registered, or who are also using the VAT margin scheme. Because of this, no input VAT can be reclaimed on the purchase.

The main benefit of the margin scheme is that when accounting for VAT a business does so only on the margin, i.e. the difference between the purchase and selling price.

If, however, a secondhand item is purchased from a VAT registered dealer, who charges VAT on the sale, then the purchase and sale of the item is dealt with in the normal way i.e. VAT is reclaimed on the purchase, and then paid on the full sale price.

Due to this, businesses who deal in the margin scheme will most likely have sales that fall within the scheme, and those that do not. Records must be kept to identify both these types of sale.

To be valid for the scheme, a retailer must keep the records such as a stock book showing the following:

 

Purchase details

Sales details

A stock number in numerical sequence

Date of sale

Date of purchase

Sales invoice number

Purchase invoice number

Name of buyer

Purchase price

Selling price or method of disposal

Any unique reference number such as the number plate of a car

VAT due (margin x VAT fraction e.g. 1/6 with a VAT rate of 20%

Description of goods (such as make and model of car, or description of piece of furniture)

 

 

Example

A secondhand item of furniture is bought by a VAT registered business from a member of the public for £1,500. It is later sold for £2,700 including VAT

The margin on the sale is therefore £2,700 - £1,500 = £1,200

The VAT included in the margin is £1,200 / 1.2 x 0.2 = £200.00

(Note you may be more familiar with using a fraction calculation of £1200 x 1/6 which is the alternative way of calculating the amount of VAT included in a figure)

This is the amount of VAT that must be paid to HMRC.

If, however, the furniture needed some work carried out before it could be sold, and the value of the work was £300, then this amount counts as going towards the cost of the item and can be included in the margin calculation.

 

Total sale price                                               £2,700

Total cost price (£1,500 + £300)                     £1,800
Margin on sale                                                  £900

VAT included = £900 / 6 = £150.00

If the furniture restorer had been VAT registered and charged £300 plus VAT, then the VAT is not claimed back but is included in the cost of the furniture.

Total sale price                                               £2,700

Total cost price (£1,500 + £360)                     £1,860
Margin on sale                                                  £840

VAT included = £840 / 6 = £140.00

 

Sales invoices

 

When operating this scheme, remember that it is only for purchases from non-VAT registered sellers, or VAT registered sellers who are themselves using the VAT Margin scheme.

 

When the item is sold, the invoice must contain the following:

 

  • Your name, address and VAT number
  • The buyer’s name and address
  • Your stock book number
  • The sales invoice number
  • Date of sale
  • Description of goods including any unique reference number
  • The total price – you must not show the VAT separately
  • A declaration “Input tax deduction has not been and will not be claimed by me in respect of the goods sold on this invoice”

 

If the goods are returned, then a separate notification must be made in the stock book.

 

Filling in the VAT return


Box 1 – include the output tax due on all eligible goods sold in the period covered by the return.

 

Box 6 – include the full selling price of all eligible goods sold in the period less any VAT due on the margin

 

Box 7 – include the full cost price of eligible goods bought in the period.

 

Specifics for secondhand cars

There are specific circumstances that apply to the buying and selling of secondhand cars.

The business must not include any cost to them of bringing the vehicle to sale. The purchase price does not include the cost of any repairs, refurbishment, accessories or any business overheads.

For example, if the business purchases new parts and fit them to a car, they must not add the cost of those parts to the purchase price of the car. You must use the original price you paid for the car when you calculate the margin for the purposes of the scheme.

 

Tour Operators Margin Scheme (TOMS)

The TOMS scheme is a specialist retail scheme that applies to travel agents and tour operators and works on a similar basis to that of the Second Hand VAT Margin Scheme, in that for every supply of a service that falls within the scheme, VAT is only due on the profit margin made on the supply.

However, unlike the secondhand scheme, the definition of what falls into TOMS and what does not is extremely complex, and the problem is often compounded by the number of projects being undertaken at any time, plus the length of time that over which provision of the supply runs. With the secondhand VAT margin scheme, quite often projects are low in number but high in value, making the calculations easier overall, whereas under TOMS the opposite can apply, making calculations cumbersome and time-consuming as it may involve apportioning costs.

A further complication is that quite often such projects, or part of such projects, take place outside the UK/EU and are affected by EU VAT rules which may have to be treated differently. The place of supply of the service needs to be considered. The percentage of turnover that the supply had as a part of total turnover is also taken into consideration. If the percentage is very small, then it does not fall into TOMS.

 

Recovering input VAT

If the purchase of a product does not fall into TOMS, then the VAT paid can be reclaimed in the normal way. If the VAT has been charged from another EU country, then the VAT must be reclaimed from that country’s VAT office and not via the UK VAT return.

Any VAT paid out on a supply that does fall within TOMS cannot be reclaimed as part of a normal VAT return but must be included in the calculation of the margin made on the sale.

 

Timing differences and reconciliations

Due to the length of time that it can take to complete the provision of the supply, all VAT transactions must be collated and stored so that the final margin may be calculated at the end of each individual supply and reported on the next VAT return. The VAT cannot be reported until the supply of the service has been completed. This means that there will always be a ‘work in progress’ system being carried forward, often for longer than a twelve-month period. In this case, at the end of the business’ financial year, a full reconciliation must be made of all supplies currently being processed.

For further information on TOMS refer to VAT Notice 709/6.

 

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