How a Retail Scheme VAT Can Work for Your Business?
Most retail businesses in the UK will have to charge their customers Value Added Tax (VAT). However, there are different amounts of VAT that are associated with certain goods and services. This can make calculating the amount of VAT that a business must pay in tax to Her Majesty's Revenue and Customs complicated.
VAT retail schemes are used by businesses to make their accounting processes easier and faster. If you operate a retail business in the UK, you should have a good understanding of all the available VAT retail schemes to determine which scheme would work best for you.
What is a VAT retail scheme?
All amounts of VAT attached to goods and services that are sold by a VAT-registered business must be recorded and reported to HMRC via a VAT return. Many retailers sell products that have different rates of VAT attached to them. This can make calculating and reporting VAT using a standard VAT accounting method a complicated process.
To save businesses time and effort, the UK government allows retailers to calculate the VAT due to HMRC when they make their tax returns, as opposed to having to calculate VAT on every sale in real time.
There are three standard VAT retail schemes that can be used by UK businesses:
- The Point of Sale Scheme – A retailer can calculate VAT by taking note of the VAT rate of the goods they sell when they sell them. For instance, a retailer adds up all the sales that attract a 20 per cent VAT rate and then divides the total by 6. For goods rated at five per cent, they would divide the total by 21.
- The Apportionment Scheme –This scheme works exactly as the Point of Sale Scheme does, however, it can only be used by businesses that buy goods for resale. To use this scheme, you must have a turnover of less than £1 million per annum.
- The Direct Calculation Scheme – This scheme is for businesses that sell a majority of their goods at one VAT rate and a small proportion at another. Again, turnover must be less than £1 million per annum.
Who can use a VAT retail scheme?
In general, any business with a turnover that is less than £130 million per year can join a VAT retail scheme. If your turnover exceeds this amount, you must contact HMRC to arrange a bespoke retail VAT scheme. It is possible for a business to combine a VAT retail scheme with the Annual VAT accounting scheme or VAT cash accounting schemes. Businesses are prohibited from using a VAT retail scheme in conjunction with VAT flat-rate schemes.
With the Apportionment Scheme and the Direct Calculation Scheme, turnover must be £1 million per year or less. With the Point of Sale Scheme, turnover must be between £1 million and £130 million per year. The Apportionment Scheme can only be used by businesses that resell goods and do not produce goods themselves, as is the case with VAT margin schemes.
Retailers must also make sure they are:
- Selling goods that have at least two VAT rates
- Have no means of dividing receipts at the point of sale into different VAT rates
- Do not change or process the goods in any way. Goods must be sold in the form in which they are purchased by the retailer
How do you join a VAT retail scheme?
There is no obligation for a retailer to apply to join a VAT retail scheme. They can simply apply the scheme at the start of a VAT period. It is also up to the retailer to choose what scheme they use.
Retailers can opt out of a VAT retail scheme at the end of a VAT period. However, if the annual turnover of the business exceeds the £130 million threshold, they will have to leave the scheme right away. Also, a business must wait at least 12 months before changing to another scheme.
If you have started a retail business, then the chances are you will have to register for VAT. Most retailers sell goods that attract different rates of VAT, which can make the VAT accounting process difficult! Joining a VAT retail scheme can streamline your accounting and administrative duties.
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