Guidance

Direct Calculation VAT Retail Schemes (VAT Notice 727/5)

Find out about the Direct Calculation VAT Retail Schemes 1 and 2, how they work and what records you must keep.

Details

This notice cancels and replaces Notice 727/5 (June 2018).

1. Overview

1.1 What this notice is about

This notice tells you about Direct Calculation Schemes 1 and 2. These are 2 of the standard retail schemes. It explains the general rules applicable to the schemes, how the schemes work (including the calculation of VAT), and what records you should keep, especially your daily gross takings (DGT) and your expected selling price (ESP) records.

1.2 Who should read this notice

You should read this if:

  • you’re a VAT-registered business making retail sales
  • you are unable to account for VAT on those sales in the normal way (see paragraph 2.2)
  • your annual retail turnover, excluding VAT, does not exceed £130 million

1.3 Other retail schemes

The other standard retail schemes are the point of sale scheme and the apportionment schemes.

Businesses whose annual retail turnover exceeds £130 million cannot use a standard scheme. Instead, they can agree a bespoke retail scheme (see paragraph 2.8).

You will find a a general introduction to retail schemes as well as guidance on choosing a retail scheme in Notice 727.

Details of the other schemes can be found in:

1.4 Force of law

Parts of this notice have the force of law under powers contained in regulations 66 to 75 of the VAT Regulations 1995 (‘the Regulations’) that enable the Commissioners to determine a retail scheme method in a notice published by them.

Paragraphs 2.6, 2.8, 3.2, 3.3, 3.4, 3.5, 3.6, 3.7, 4.2, 4.2.1, 4.2.2, 4.2.3, 4.3, 4.3.1, 4.4, 4.4.1, 4.4.2, 4.5, 4.5.1, 4.5.2, 5.1, 5.3, 6.3, 6.3.2, 6.3.3, 6.5, 6.7, 6.24, 6.25 and 7.4.4 have the force of law.

The text concerned is noted accordingly.

2. General rules

2.1 Who can use a retail scheme

Retail is the selling of goods or services to consumers and retail schemes are aimed at retailers that cannot account for VAT using normal accounting.

2.2 Normal accounting for VAT

Accounting for VAT in the normal way does not require you to issue a tax invoice to unregistered customers, but it does require you to identify, for each sale, the tax exclusive value and the VAT and to be able to produce periodic totals of those amounts.

2.3 Choosing a retail scheme

Some of the schemes have turnover limits read paragraph 3.2 for guidance on when to use the direct calculation schemes.

Otherwise, as long as your chosen retail scheme produces a fair and reasonable result, then you may choose a scheme which suits your business best.

Notice 727 tells you more about choosing a retail scheme.

2.4 What you can account for using the schemes

Under the regulations, you can only use the retail schemes to account for retail sales. If you make a mixture of retail and non-retail sales, you must only use a retail scheme to calculate the tax due on your retail sales. You must account for tax due on non-retail sales using the normal method of accounting.

2.5 What you must do if you make sales to other VAT-registered businesses

You must issue a tax invoice to VAT-registered customers. Invoicing is explained in sections 16 and 17 of Notice 700.

These sales should be accounted for under normal accounting rules unless they are of an occasional nature or made using a less detailed VAT invoice (read paragraph 16.6 of Notice 700).

2.6 When you can change schemes

Under the Regulations, you can change schemes at the end of a complete year, reckoned from the beginning of the tax period in which you first adopted the scheme. But you must use a scheme for 12 months, unless either:

  • you become ineligible for the scheme you are using
  • HMRC allows or requires an earlier change

The following sentence has the force of law.

If you become ineligible to use a scheme, you must cease using the scheme from the end of the next complete accounting period.

For example, if you account for VAT by reference to quarters ending March, June, September and December and your turnover makes you ineligible for a scheme during February, you must cease to use that scheme to account for supplies made on or after 1 July.

Some of the schemes require adjustments when you cease using them (see paragraph 3.6 for guidance on adjustments required under the direct calculation schemes).

2.7 Changing schemes retrospectively

Retrospective changes to retail schemes are not normally allowed. The VAT and Duty Tribunals have repeatedly confirmed the principle that where you operate a scheme according to the published rules (or an agreed variation), the tax which is due under that scheme is the correct VAT for the period. You cannot change schemes retrospectively simply because another scheme produces a lower or different valuation.

HMRC may allow retrospective change in exceptional cases. If you think you have exceptional grounds for a retrospective change you should contact the VAT general enquiries helpline, giving as much detail as possible.

The maximum period for recalculation following a retrospective change of scheme is 4 years and you must have been, and remain, eligible to use the new scheme during the full period that your application relates to.

2.8 Exceeding the scheme’s turnover limit

The first paragraph has the force of law.

Businesses whose annual turnover from all retail sales exceeds £130 million cannot use any of the standard retail schemes including the direct calculation schemes. Instead, they can agree a bespoke retail scheme.

If you think your annual retail turnover (excluding VAT) is about to exceed £130 million, you should contact HMRC as soon as possible to agree a bespoke retail scheme. A bespoke retail scheme will be tailored to meet the particular requirements of your business and is likely to be a variation of one of the published standard schemes.

For more information, read Notice 727/2.

3. The Direct Calculation Schemes 1 and 2

Unless stated otherwise, this section applies to both Direct Calculation Schemes 1 and 2.

3.1 How the direct calculation schemes work

The schemes work by calculating the ESP of goods for retail sale at 1 or 2 rates of VAT in order to establish the proportion of your DGT on which VAT is due. When this notice refers to ‘class of goods’ it means goods attracting the same VAT rate on sale.

If you set ESP for the standard-rated class of goods and your standard-rated stock has a slow turnover you should be aware that the direct calculation schemes may not be the best suited to your business, as you will pay VAT in the period in which the goods are received and not necessarily when they are sold.

The direct calculation schemes can be relatively simple if you have a small proportion of supplies at one rate. But they can produce significant inaccuracies if ESP are not calculated accurately. Additionally they can be complex to work if you sell goods at 3 rates of tax.

3.1.1 Scheme overview

Scheme 1

The scheme:

  • cannot be used if your annual tax exclusive retail turnover exceeds £1 million (for more information see paragraph 3.5)
  • permits you to calculate the ESP of your minority or majority class of goods

Scheme 2

Scheme 2 operates broadly in the same way as Scheme 1, but:

  • requires an annual stock adjustment to correct any under or over payment of VAT during the year (see paragraph 4.5)
  • requires you to always calculate the ESP of your ‘minority goods’

3.1.2 Identifying ‘minority goods’

These are the goods at the rate of tax which forms the smallest proportion of your retail supplies.

For example, your minority class of goods are your zero-rated goods if you make:

  • 60% standard-rated sales
  • 40% zero-rated sales

You therefore calculate the ESP for your zero-rated goods received, made or grown for retail sale and then deduct this from your DGT. This gives you your figure for standard-rated sales, to which you apply the VAT fraction to arrive at your output tax liability.

But your minority class of goods are your standard-rated goods if you make:

  • 60% zero-rated sales
  • 40% standard-rated sales

In this case, you calculate the ESP for your standard-rated goods received, made or grown for retail sale and then apply the VAT fraction to this figure to arrive at your output tax liability.

3.1.3 Reduced rate goods

While most retailers will find that the range of reduced rate goods they sell will be quite small, these should not be considered the minority class of goods for the purpose of the scheme. You still need to calculate the ESP of reduced rate goods, and then follow the calculations in paragraph 4.4. If this does not work for your business then contact HMRC who may be able to agree an alternative method.

3.2 When to use the direct calculation scheme

Paragraph 3.2 has the force of law.

You can use a direct calculation scheme if you are a retailer making supplies at 2 or more VAT rates and you can identify the ESP of the purchases at the time you make them.

If you only supply goods at one rate (that is, all zero-rated, all reduced-rated or all standard-rated) you must use the Point of Sale VAT Retail Scheme.

You cannot use a direct calculation scheme for:

  • zero-rated services if your minority sales are zero-rated
  • standard-rated services if your minority sales are standard-rated
  • supplies of catering

3.3 Using other schemes with the direct calculation schemes

Normally, a retail scheme uses a single calculation for the whole of your VAT registration. But you can use the same scheme separately at a number of distinct business locations or use a number of schemes at the same location provided that you make any necessary adjustments to account for transfers of goods between schemes and you agree the details of how this will be done with HMRC.

You can always use the normal method of accounting together with any scheme or any allowable mixture for which you’re eligible.

The following bullet points have the force of law.

Provided you are eligible to use the schemes:

  • you can mix the Point of Sale VAT Retail Scheme with either of the direct calculation schemes
  • you cannot use different versions of the direct calculation scheme at the same time and you must not mix a direct calculation scheme with an apportionment scheme

3.4 Keeping records

Section 5 gives examples of what should be included in your DGT.

The normal record keeping requirements also apply.

The following bullet points have the force of law.

You must keep a record of:

  • your sales (DGT)
  • any adjustments you make to the totals
  • the working papers you use to calculate your output tax
  • a record of your ESP

3.5 If you exceed the turnover limit

The turnover limit for the scheme applies to the whole of your VAT registration.

3.5.1 Scheme 1 turnover limit

The first paragraph has the force of law.

If your turnover is over £1 million, you must cease to use Direct Calculation Scheme 1 unless you expect your turnover to be below £1 million in the following 12 months and HMRC agrees to you remaining on Scheme 1.

Direct Calculation Scheme 1 is available to businesses with an annual tax exclusive retail turnover not exceeding £1 million. If you think your annual tax exclusive turnover is about to exceed £1 million, you should consider moving to Direct Calculation Scheme 2 or any of the other standard retail schemes (paragraph 2.3). But if you can show that you do not expect your turnover to remain over £1 million in the coming year, HMRC may agree to you remaining on Direct Calculation Scheme 1.

3.6 Ceasing to use the scheme

Section 3.6 (including subparagraphs) has the force of law.

3.6.1 Direct Calculation Scheme 1

If you cease to use Direct Calculation Scheme 1 no adjustment is required.

3.6.2 Direct Calculation Scheme 2

If you cease to use Direct Calculation Scheme 2 you must do a closing adjustment, as for the annual adjustment (paragraph 4.5), for the tax periods since your last adjustment.

3.7 Other rules when stopping the schemes

Apart from making the adjustments as explained in paragraph 3.6, you should also:

The first bullet point has the force of law.

  • only include goods sold by retail in your scheme, if you transfer part or all of your business as a going concern and you cease to use the scheme, you will have to exclude the value of the stock which has been transferred from your retail scheme
  • make additional adjustments where unusual patterns of trade prevent your chosen scheme from producing a fair and reasonable result

3.8 Operating the scheme

You’re responsible for ensuring that any staff you employ are able to operate your systems correctly, even at the busiest times. If you operate the scheme incorrectly, you could declare the wrong amount of VAT and be subject to an assessment and a financial penalty.

4. Mechanics of the Direct Calculation Schemes (1 and 2)

Unless stated otherwise, this section applies to both schemes.

Both direct calculation schemes work in very much the same way. But Scheme 2 requires you to carry out a stock-take and to make an annual adjustment (paragraph 4.5).

Both schemes provide for a supplementary calculation for goods liable to tax at the reduced rate. The calculation templates at paragraphs 4.4 and 4.5 work whether or not you make both zero and standard-rated supplies.

4.1 How to calculate VAT under the Direct Calculation Schemes

The schemes work by applying the appropriate VAT fractions to your totals of standard rate and reduced rate DGT to establish the amount of tax that is due on your eligible retail sales. This gives you your scheme output tax.

Section 5 explains the DGT rules in detail.

The VAT fraction is simply a way of calculating the amount of VAT contained in the total gross takings. Notice 700 tells you more about the VAT fraction.

4.2 Starting to use the direct calculation schemes

Before you start to use a direct calculation scheme, you have to decide which class of goods you are going to set ESP for. You will have to estimate whether the larger portion of your sales is standard-rated or zero-rated. If you also make reduced-rated supplies you will also have to consider these in making your estimate.

The next sentence has the force of law.

Once you have started to set ESP for a class of goods, you must continue to set ESP for that class of goods for the whole of the retail scheme year.

4.2.1 Before you start to use the Direct Calculation Scheme 1

The first paragraph has the force of law.

Retailers using Direct Calculation Scheme 1 must calculate the ESP for the class of goods chosen for the scheme. Retailers may mark up the minority goods or majority goods depending on which is more straightforward for them to do.

For example, newsagents may find it easier to set ESP for their majority sales of magazines and newspapers. There will be fewer purchase records for these than for their minority standard rated sales of tobacco and confectionery which may come from a variety of sources.

4.2.2 Before you start to use the Direct Calculation Scheme 2

Paragraph 4.2.2 has the force of law.

Retailers using Direct Calculation Scheme 2 must calculate the ESP for the class of goods forming the smallest proportion minority goods of their supplies.

4.2.3 Direct calculation schemes opening stock

Paragraph 4.2.3 has the force of law.

When you first start to use the scheme:

  • for Direct Calculation Schemes 1 or 2, you must not include goods you have in stock as goods received in the period, but if you have stock items which you intend to sell and not restock, you must include these in your calculation unless these goods have already been allowed for by you in a previous scheme
  • for Direct Calculation Scheme 2, you must know the ESP of the minority goods in stock, although you will not need to use this information until the annual adjustment is due

4.3 ESP calculations

Paragraph 4.3 has the force of law.

For each period you must calculate the total ESP of all goods you purchase for resale for the class of goods chosen for the scheme. You must:

  • always be consistent in the method you use (both within one period and from one period to another)
  • record any adjustments and keep the working papers with your retail scheme calculations
  • make adjustments to the ESP at the end of each tax period to take account of factors which might affect the actual selling price

4.3.1 How to calculate ESP

HMRC does not prescribe any particular method of calculating your ESP. But as your ESP calculation has a direct effect on the tax you pay under the scheme, you must calculate it as realistically and accurately as possible. You will need to keep the calculation under review to reflect factors which prevent you from achieving the ESP for any items.

The most common methods of calculating ESP are one of the following:

(a) mark up each line of goods - this is the most accurate method
(b) mark up classes of goods - for example vegetables or confectionery
(c) use recommended retail prices (RRP)

The following 2 bullet lists have the force of law.

You can only use method (b) if:

  • you are unable to mark up each line, as in (a)
  • the variation in mark up within the group is no more than 10%
  • the mark up is reviewed each quarter
  • the class of goods has a commercial basis and is not constructed artificially

You can only use method (c) if:

  • you use the RRP as your selling price
  • you’re able to record the RRP on receipt of the goods
  • your invoices or other supplier documentation show the tax inclusive RRP of each separate line of goods, distinguish standard-rated, reduced-rated and zero-rated sales and show the total of goods at each rate of tax

4.3.2 What not to include in your ESP calculation

Paragraph 4.3.2 has the force of law.

You must not include in your calculation the ESP of:

  • goods bought for wholesale sales
  • goods bought for private use
  • disposals of stock resulting from a sale of all or part of the business

4.3.3 ESP adjustment

As ESP will rarely be fully achieved in your retail scheme, you must make adjustments at the end of each tax period to take account of factors which might affect the actual selling price.

For example:

  • price changes such as increases and decreases, for example, sell by date reductions
  • special offers and promotion schemes
  • wastage
  • freezer breakdowns
  • breakages
  • shrinkage, such as pilferage and loss of stock
  • bad debts that have been written off in the period

This list is not exhaustive, if you’re aware of other factors which affect your ESP you must make the appropriate adjustment.

How you make these adjustments is up to you but you must always be consistent in the method you use (both within one period and from one period to another). You must also record any adjustments and keep the working papers with your retail scheme calculations.

4.3.4 Difficulties in making ESP adjustments

If you have difficulty in making these adjustments, you may need to use another scheme. But HMRC may either agree:

  • a method of sampling where reductions cannot be established accurately
  • to the omission of certain adjustments where the effect does not distort your retail scheme

4.4 Step-by-step Schemes 1 and 2 calculations

Paragraph 4.4 has the force of law.

If you are using Direct Calculation Scheme 2 you must also make the adjustment described in paragraph 4.5 after you have calculated your output tax for the fourth quarter, and you must account for any difference on your return for that quarter.

4.4.1 Setting ESP for zero-rated goods

Paragraph 4.4.1 has the force of law.

The following is a step-by-step guide to how you to calculate your VAT using Schemes 1 or 2 has the force of law.

If you set ESP for your zero-rated class of goods then you should make your scheme calculation as follows:

Step Description Amount
1 Add up your DGT for this tax period (see section 5) £___
2 Add up the fully adjusted ESP of your zero-rated goods received, made or grown for retail sale in the tax period £___
3 (Total at step 1 less the total at step 2) × 1/6 (VAT at 20%) If you do not make supplies at the reduced rate of tax, this is your Scheme 1 or 2 output tax.

If you make supplies at the reduced rate follow the additional steps below
£___
4 Add up the fully adjusted ESP of your reduced-rated goods received, made or grown for retail sale in the tax period £___
5 Multiply the figure at step 4 by 1/21 (VAT at 5%) £___
6 Multiply the total at step 4 by 1/6 (VAT at 20%) £___
7 Total at step 3 less (total at step 5 less the total at step 6)

This is your Scheme 1 or 2 output tax
£___

4.4.2 Setting ESP for standard-rated goods

Paragraph 4.4.2 has the force of law.

If you set ESP for your standard-rated class of goods then you should make your scheme calculation as follows:

Step Description Amount
1 Add up your DGT for this tax period (see section 5).

Although this is not used in this calculation, it is still a requirement of operating the scheme and is also used in completing your VAT Return
£___
2 Add up the fully adjusted ESP of your standard-rated goods received, made or grown for retail sale in the tax period £___
3 Multiply the figure at step 2 by 1/6 (VAT at 20%)

If you do not make supplies at the reduced rate of tax, this is your Scheme 1 or 2 output tax.

If you make supplies at the reduced rate follow the additional steps below
£___
4 Add up the fully adjusted ESP of your reduced-rated goods received, made or grown for retail sale in the tax period £___
5 Multiply the figure at step 4 by 1/21 (VAT at 5%) £___
6 Total at step 5 + total at step 3

This is your Scheme 1 or 2 output tax
£___

4.5 Annual adjustment (for Scheme 2 only)

This paragraph details the annual adjustment required if you use Direct Calculation Scheme 2.

Scheme 2 is based on your retail trade over a full year. This year runs from the beginning of the first tax period in which you use the scheme.

At the end of each year you must make an adjustment to reflect the actual sales made by your retail outlets during the year. It compares the movement in stock and levels of goods received, made or grown for retail resale with what has been accounted for under the scheme calculations for the year.

The next sentence has the force of law.

Once you’ve calculated your output tax due under the retail scheme for the fourth quarter as in paragraph 4.4, you must carry out the annual adjustment as described below.

4.5.1 If you set ESP for zero-rated goods

Paragraph 4.5.1 has the force of law.

The adjustment must take account of any disposals since the last adjustment which were not made by way of retail sale. You do this by excluding from the figures used in the calculation the value of any goods which were previously part of the scheme calculation, or included in the opening stock figure, but have not been sold by way of retail.

The adjustment is also required if a part of your business leaves the scheme.

Step Description Amount
1 When you begin to use the scheme establish the fully adjusted ESP of your opening stock of zero-rated goods for retail sale £___
2 When you begin to use the scheme establish the fully adjusted ESP of your opening stock of reduced-rated goods for retail sale £___
3 Add up your DGT for the 4 quarters £___
4 Total the fully adjusted ESP of your zero-rated goods received, made or grown for retail sale in the four quarters, and add the opening zero-rated stock figure at step 1 £___
5 At the end of the scheme year, or when you cease to use the scheme, establish the fully adjusted ESP of your closing stock of zero-rated goods for retail sale (this becomes your opening zero-rated stock figure for the next year) £___
6 Deduct the figure at step 5 from the figure at step 4. This gives the fully adjusted ESP for the zero-rated goods you have sold by retail in the year £___
7 Total the fully adjusted ESP of your reduced-rated goods received, made or grown for retail sale in the four quarters, and add the opening reduced-rated stock figure at step 2 £___
8 At the end of the scheme year, or when you cease to use the scheme, establish the fully adjusted ESP of your closing stock of reduced-rated goods for retail sale (this becomes your opening reduced-rated stock for next year) £___
9 Deduct the figure at step 8 from the figure at step 7. This gives the ESP for the reduced-rated goods you have sold by retail in the year £___
10 Deduct the figure at steps 6 and 9 ( if applicable) from the figure at step 3. This gives you your standard-rated takings for the year £___
11 Multiply the figure at 10 by 1/6 (VAT at 20%) £___
12 Multiply the figure at step 9 by 1/21 (VAT at 5%) £___
13 Add together the figures at step 11 and step 12 (if applicable) to arrive at the output tax due under the retail scheme £___
14 Add up the output tax you have paid under the retail scheme in the 4 quarters £___
15 If the figure at step 13 is greater than the figure at step 14 you have paid too little tax and you should add the difference to your output tax in the fourth quarter.

If the figure at step 13 is smaller than the figure at step 14 you have paid too much tax and you should deduct the difference from your output tax in the fourth quarter
£___

If you only make supplies at two rates of tax, you can skip step 2, 7, 8, 9 and 12.

4.5.2 If you set ESP for standard-rated goods

Paragraph 4.5.2 has the force of law.

The adjustment must take account of any disposals since the last adjustment which were not made by way of retail sale. You do this by excluding from the figures used in the calculation the value of any goods which were previously part of the scheme calculation, or included in the opening stock figure, but have not been sold by way of retail.

The adjustment is also required if a part of your business leaves the scheme.

Step Description Amount
1 When you begin to use the scheme establish the fully adjusted ESP of your opening stock of standard-rated goods for retail sale £__
2 Total the fully adjusted ESP of your standard-rated goods received, made or grown for retail sale in the 4 quarters £__
3 Add together the totals at step 1 and step 2 £__
4 At the end of the scheme year, or when you cease to use the scheme, establish the fully adjusted ESP of your closing stock of standard-rated goods for retail sale (this becomes your standard-rated opening stock figure for the next year) £__
5 Deduct the figure at step 4 from the figure at step 3. This gives the ESP for the standard-rated goods you have sold by retail sale in the year £__
6 Multiply the figure at step 5 by 1/6 (VAT at 20%) £__
7 Add up the output tax you have paid under the retail scheme in the 4 quarters £__
8 If the figure at step 6 is greater than the figure at step 7 you have paid too little tax for your standard-rated supplies of goods and you should add the difference to your output tax in the fourth quarter.

If the figure at step 6 is smaller than the figure at step 7 you have paid too much tax for your standard-rated supplies of goods and you should deduct the difference from your output tax in the fourth quarter
 

If you also make supplies at the reduced rate repeat steps 1 to 8 substituting reduced-rated for standard-rated, and at step 6 swap 1/21 for 1/6.

4.6 How to complete your VAT Return

Your output tax figure is used to complete box 1 of your VAT Return (form VAT100). If you’re using more than one scheme you must add together the output tax calculated from each scheme as well as any other amounts of output tax which are due, and put the total in box 1.

Read Notice 700/12 for more information about how to fill in and submit your VAT Return.

5. DGT checklist

5.1 What must be included in your DGT

Your DGT record includes:

  • all cash payments as they are received by you or on your behalf from cash customers for your retail supplies
  • the full value, including VAT, of all your credit or other non-cash retail sales at the time you make the supply
  • details of any adjustments made to these figures

The following paragraph has the force of law.

The DGT record is a record of all your retail supplies and is a crucial part of your retail scheme records. It is this figure and not simply cash on hand which you must use when calculating output tax due under your retail scheme.

5.2 Recording your DGT

You should include all forms of cash payment in your DGT as they are received from customers. Examples of cash payments are:

  • cash
  • cheques
  • payments by debit or credit cards
  • electronic cash payments,
  • the face value of gift, book and other vouchers redeemed (subject to paragraph 7.3)
  • any other payments for retail sales
  • the value of any payment in kind for retail sales

5.3 Adjusting your DGT

The first 2 paragraphs have the force of law.

You must retain evidence to support any adjustments to your DGT figure. If you make an adjustment but subsequently receive a payment, you must include that payment in your DGT for the date received.

You must not reduce your DGT for till shortages which result from theft of cash, fraudulent refunds and voids or poor cash handling by staff. See paragraph 6.13 for further details.

But, you may reduce your DGT for the following:

  • counterfeit notes
  • illegible credit card transactions (where a customer’s account details are not legible on the credit card voucher and therefore cannot be presented or redeemed at the bank)
  • unsigned or dishonoured cheques from cash customers (but not from credit customers)
  • chargebacks
  • inadvertent acceptance of out of date coupons or vouchers which have previously been included in your DGT but which are not honoured by promoters
  • receipts recorded for exempt supplies
  • receipts recorded for supplies which are to be accounted for outside the scheme
  • refunds to customers for overcharges, returned or faulty or unsuitable goods
  • float discrepancies
  • till adjustments, for example, correcting mechanical faults, staff training and voids (where a mistake has been made and corrected at the time of error)
  • adjustments referred to in paragraphs 6.2.2, 6.3, 6.4 and 6.6

5.4 Foreign currency

If you accept foreign currency then this should be included in your DGT at the sterling equivalent value. Section 7 of Notice 700 explains how to do this and has the force of law.

Foreign currency inadvertently accepted does not need to be accounted for in the DGT provided that it is of minimal value and not exchanged for sterling.

5.5 Transactions not covered in this section

If you have a particular type of transaction which is not covered in this section, you may find more help in section 6.

There is also advice on the treatment of business promotions in section 7.

6. Special transactions

If you have a particular type of transaction which is not covered in this section, you should contact the VAT general enquiries helpline for advice.

6.1 Acquisitions from EU member states

Notice 725 explains how to account for VAT on goods purchased (acquisitions) from EU member states.

Suppliers from the EU will not charge VAT on their sales to you but you will have to account for VAT at the rate applicable to the goods in the UK.

For retail scheme purposes, references in this notice to zero-rated goods apply only to goods which are zero-rated in the UK. Goods which you acquire from EU member states at the zero rate but which are reduced or standard-rated in the UK, should be treated as such in your retail scheme calculations.

6.2 Retail sales to persons residing in EU member states

6.2.1 Supplies to visitors from the EU

Unlike non-EU visitors (see paragraph 6.3.1) there is no VAT relief available for EU visitors. Sales to EU visitors are treated exactly the same way as sales to UK customers.

6.2.2 Supplies to consumers in EU member states (distance selling)

These are supplies which you arrange to be delivered to your EU customer in a member state. Unless you are or have a liability to be registered in that member state (read section 6 of Notice 725 and section 6 of Notice 700/1) you should charge UK VAT as normal.

Where you’re registered in the EU for distance selling then these sales are outside the scope of UK VAT and should be excluded from your UK VAT account.

6.3 Exports to countries outside the EU

6.3.1 Retail Export Scheme

Paragraph 6.3.1 has the force of law.

This is for retailers selling goods for export from the EU by eligible visitors who make the purchase in person.

If you make supplies under the terms of the Retail Export Scheme as described in Notice 704, you should account for tax as follows:

(a) Include in your DGT all amounts, including VAT, for goods sold for retail export. Do not deduct the refunds which you expect to make to customers.

(b) At the end of each tax period, add up the VAT amounts for reduced and standard-rated goods which have actually been exported and where VAT has been repaid. This will be the total of the amounts shown on the officially certified forms returned to you during the period. Do not adjust for any administration charge you have or expect to make to customers.

(c) Adjust the tax at (b) in your VAT account.

6.3.2 Direct Refund Scheme

Paragraph 6.3.2 has the force of law.

Sales under the direct reclaim system (paragraph 5.7 of Notice 704) should be treated as a normal accounting sale to the refund company.

6.3.3 Administrative charges

Paragraph 6.3.3 has the force of law.

If you make administrative charges or use a refund company to administer the refund on your behalf, you still have to account for the VAT on the principal supply as explained in paragraphs 5.1 and 5.2 of Notice 704. Any charges you make should be accounted for as an adjustment to the VAT account and not as a netting off against the refund.

6.3.4 Direct and indirect exports

If you as a retailer, export goods direct or supply goods in the UK to overseas traders for subsequent indirect export by them as described in Notice 703, you should account for these goods as an adjustment to your VAT account. You will also need to adjust your ESP.

6.4 Exempt supplies

Any payments received for supplies which are exempt from VAT must be excluded from your scheme calculations.

If you make exempt supplies, you will need to consider the rules on partial exemption explained in Notice 706 and Notice 706/2.

6.5 Goods bought at one rate and sold at another

For some goods the rate of tax you charge depends on how they are offered for sale. For example, meat is zero-rated when sold for human consumption but the same meat becomes standard-rated when sold as pet food.

As the retailer, you are responsible for ensuring that the correct liability for VAT is applied when you sell goods.

The rest of paragraph 6.5 has the force of law.

All goods you buy at one rate of tax and sell at another should be treated as follows:

If you keep separate stocks of the goods that you put up or hold out for sale at the different tax rates, you must enter them in your records of goods received for resale at the tax rate that will apply when they are sold.

If you hold a common stock of those goods that you draw on to sell at different tax rates, you must enter in your scheme records at the tax rate that applied when you received them. When they’re put up or held out for sale at the other tax rate, you must:

(a) deduct the appropriate amounts from your scheme records at the tax rate that applied when you received the goods.

(b) enter the corresponding amounts in your scheme records at the tax rate that applies when you sell them.

6.6 Goods sold on ‘sale or return’, ‘approval’ or similar terms

You should keep a separate record of goods supplied on a ‘sale or return’ or ‘approval’ basis. You should only account for these when the customer has adopted the goods. If the customer pays a deposit, see paragraph 6.8.

6.7 Credit transactions

The first paragraph has the force of law.

You must account for output tax on credit retail supplies by including the full value of the goods in your DGT at the time you make the supply. Do not wait until you are paid and do not include the instalments in the DGT when they are received.

Additional rules apply depending on the way the credit sales are financed. You should read paragraph 8.4 of Notice 700, which explains the most common scenarios for supplies on credit and the use of finance companies and the direction of the supplies.

6.7.1 Supplies involving a finance company

If you arrange credit for your customer through a finance company, you should include the full amount paid for the goods by the customer in your DGT at the time you make the supply.

6.7.2 Self-financed credit supplies

If you make a separate charge for credit (additional to the cash price) and you disclose it to the customer, this is exempt from VAT and should be excluded from your DGT.

If your turnover is less than £1 million and you run a business where your customers do not pay for the goods when they receive them (for example, you may be a milkman or newsagent), you may take account of opening and closing debtors in your scheme calculations. Paragraph 4.5 of Notice 727 gives an example of how to do this.

6.8 Deposits

Most deposits are an advance payment for a supply and must be included in your DGT.

But if you take a deposit for another reason, for example as security to ensure the safe return of goods, you should exclude this amount from your DGT (regardless of whether it is eventually refunded or forfeited).

6.9 Refunds

If you refund some or all of the payment made by the customer, you may deduct the amount which was refunded or credited to customers from your DGT, to a maximum of the amount originally charged.

6.10 Delivery charges

6.10.1 Single supply of delivered goods

Under the normal rules, if, in order to fulfil your contract for the sale of the goods, you also deliver them, there is a single supply of delivered goods unless the goods are supplied on approval. It does not matter whether the charge you make for delivery is separately itemised or invoiced. Examples of supplies of delivered goods are doorstep deliveries of milk or newspapers. The liability of the delivery charge follows the liability of the goods. In such a case, you should include the full amount charged in your DGT.

6.10.2 Goods on approval

If you supply goods on approval terms, there is no supply of the goods at the point of delivery. Any supply of the goods that does take place will be at the point at which the goods are subsequently adopted by the customer. In such cases, the delivery service provided does not form part of a single supply of delivered goods but is a separate standard rated supply, that is the supply of delivery of the goods to enable the customer to inspect them prior to making a decision as to whether or not to purchase them. In such a case, you should account for any VAT as an adjustment to your VAT account.

6.10.3 Separate supply of delivered goods

If you supply goods under a contract that does not require delivery but where, nevertheless, you agree to deliver the goods and make a separate charge, then that charge is normally for a standard-rated supply of delivery services and you should account for any VAT as an adjustment to your VAT account.

6.11 Vouchers

Sections 8 and 9 of Notice 700/7 explain vouchers in more detail.

Section 7 of this notice explains how to account for vouchers on redemption.

6.11.1 Single purpose vouchers

These must be accounted for in your DGT when they are sold. Vouchers that are given away may give rise to a deemed supply of the goods or services and an adjustment made outside of the retail scheme.

Vouchers issued before 1 January 2019

Details Accounting procedures
Single purpose voucher Any VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain the reward goods or services from you. If you subsequently receive payment for the voucher from the issuer, this is the consideration for the supply and should be accounted for as an adjustment to your VAT account.

Vouchers issued on or after 1 January 2019

Details Accounting procedures
Single purpose voucher Any VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain the goods or services from you. However, where the redeemer and issuer of the voucher are different persons there is a supply of the goods or services to the issuer, which needs to be accounted for by the redeemer in accordance with paragraph 2.5 of this notice.

6.11.2 Multi purpose vouchers

Multi purpose vouchers should be accounted for in accordance with the table below.

If you then
sell gift vouchers at a value higher than their face value the excess is consideration for a supply of services and VAT should be accounted for outside the retail scheme
sell gift vouchers at their face value do not include the amount in your DGT
sell gift vouchers at a price lower than their face value do not include the amount in your DGT
include own gift vouchers with other products for a single charge if the customer has no choice but to accept the voucher when the products are supplied VAT is due on the full price of the products. The voucher is considered to be supplied for free
issue gift vouchers free of charge no VAT is due on issue
have purchased a third party’s gift vouchers which you intend to issue free of charge (for example in your own promotion) you normally have not been charged VAT. Equally, you do not have to account for any VAT when you give them away

6.12 Sale of discount vouchers or cards

If you sell discount vouchers or cards entitling the holder to discounts on purchases from you (commonly referred to as ‘money-off coupons’), you must include the payment received in your DGT.

For example if the voucher or card can only be used for purchases of zero-rated goods you should add the payments received for the voucher or card to your zero-rated DGT.

If you sell discount vouchers or cards entitling the holder to discounts at several traders, this is a standard-rated supply and you must add the payments received to your standard-rated DGT.

6.13 Theft, shrinkage, leakage and stock losses

If you find that there are unexplained accounting discrepancies between stock and sales, you must consider the extent to which this is attributable to unrecorded sales, such as to the theft of cash by staff, and add the value back to your DGT.

Where possible, these adjustments should be allocated to the specific VAT period in which the theft took place. Otherwise, such shrinkage should be apportioned across relevant tax periods on a fair and reasonable basis.

Unless you have evidence of the liability of the unaccounted supplies, adjustments must be in line with the usual proportion of standard against zero-rated supplies.

When you do this exercise, you will need to consider whether the shrinkage, for which you have adjusted your DGT, requires you to further adjust your ESP to correct any significant distortion of the calculation.

Losses due to shoplifting or damage do not affect your DGT records as no supply will have been made.

6.14 Disposal of business assets

If you dispose of a business asset, such as a cash register or a van, you should account for VAT as an adjustment to your VAT account.

6.15 Private or personal use of goods

Under the normal rules, tax is due (at cost price) on any positive rated goods purchased for resale which you then take out of your business for private or personal use (see Notice 700) and you should adjust your VAT account accordingly.

You must also make an appropriate adjustment for the cost of the goods from the ESP calculations.

6.16 Part-exchange

When you accept goods or services in part-exchange for a supply, you should include in your DGT the full selling price, including VAT, of the goods you supplied.

If you resell goods you have accepted in part-exchange you may be able to use the Second-hand Margin Scheme (see paragraph 6.17). But if you are unable to use that scheme you should include the resale of the part exchange goods in your retail scheme.

6.17 Second-hand goods

You may be able to use the special scheme for second hand goods, see Notice 718 for second-hand goods, works of art, antiques and collectors’ items.

These should be accounted for as an adjustment to your VAT account. If the scheme is not used, then sales of second hand goods should be accounted for within your retail scheme in the same way as new goods.

6.18 Sale or assignment of debts

If you sell or assign debts due from your customers, no adjustment to your VAT account is necessary since you will already have included the correct amount when you made the supply.

6.19 Sales where you act as an agent for a third party

Normally you will be paid a commission which should be accounted for as an adjustment to your VAT account. Payments you receive and pass on to the third party do not form part of your DGT.

6.20 Amusement and gaming machines

If you’re using either of the direct calculation schemes, you should exclude the takings from the machines from your DGT. VAT should be accounted for as an adjustment to your VAT account.

For details of how to work out the taxable take, see Notice 701/29.

6.21 Catering

Section 7 of Notice 727, which has the force of law, explains how caterers should account for VAT.

6.22 Retail chemists

Section 8 of Notice 727, which has the force of law, explains how chemists should account for VAT.

6.23 Florists

If you’re a member of an organisation such as Interflora and Teleflorist, see section 9 of Notice 727, which has the force of law, explains how florists should account for VAT.

6.24 Goods bought from unregistered suppliers

Paragraph 6.24 has the force of law.

If you buy goods for retail sale from suppliers who are not registered for VAT, you must include these goods in your scheme calculation for the rate normally applicable to those goods.

6.25 Recall of goods by manufacturers

Paragraph 6.25 has the force of law.

If a manufacturer recalls contaminated or otherwise faulty goods you must adjust your ESP records.

7. Business promotions

The general guidelines on the VAT treatment of business promotion schemes covered in this section are given in Notice 700/7.

This guidance tells you how to account for VAT on the most common forms of business promotion. If you wish to operate a particular promotion scheme which is not covered below you should contact VAT general enquiries.

7.1 Business entertainment or gifts

If you purchase goods or you use goods from your normal stock for business entertainment, you should read Notice 700/65.

If you give stock away as gifts, you should read Notice 700/7.

Subject to the rules set out in these notices, you must account for any tax due by adjusting your VAT account by the value at cost.

7.2 Voucher redemptions

7.2.1 Discount vouchers

These are also known as ‘money-off coupons’, see section 7 of Notice 700/7, for more information.

Details Accounting procedures
As part payment See paragraph 7.3 of Notice 700/7 for information about about the redemption of coupons.
Handling charges If you make a further charge to a manufacturer for handling the vouchers after redemption, this is payment for a supply which is exempt from VAT and should not be included in your DGT. Other charges, for example, relating to running the promotion should be accounted for as an adjustment to your VAT account.
Sale If you sell discount vouchers, see paragraph 6.12 of this notice.

7.2.2 Vouchers

Vouchers issued before 1 January 2019

Details Accounting procedures
Single purpose voucher Any VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain the goods or services from you. If you subsequently receive payment for the voucher from the issuer, this is the consideration for the supply and should be accounted for as an adjustment to your VAT account.
Credit voucher No VAT was due upon issue. When the voucher is redeemed, it should be entered into the DGT at its face value. If you subsequently receive payment for the voucher from the issuer, there is nothing further to account for. Any fee charged by the issuer should be treated as a cost to the business.
Retailer voucher No VAT was due upon issue. When the voucher is redeemed, it should be entered into the DGT at the value it was initially sold for.
Other vouchers No VAT was due upon issue. When the voucher is redeemed, it should be entered into the DGT at its face value. If you subsequently receive payment for the voucher from the issuer, there is nothing further to account for. Any fee charged by the issuer should be treated as a cost to the business.

Vouchers issued on or after 1 January 2019

Single purpose voucher Any VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain goods or services from you. However, where the redeemer and issuer of the voucher are different persons there is a supply of the goods or services to the issuer, which needs to be accounted for by the redeemer in accordance with paragraph 2.5 of this notice.
Multi purpose voucher No VAT was due upon issue. When the voucher is redeemed, it should be entered into the DGT at its face value, or value of the consideration paid at the last transfer where known. If you subsequently receive payment for the voucher from the issuer, there is nothing further to account for. Any fee charged by the issuer should be treated as a cost to the business.

Read sections 8 and 9 of Notice 700/7, for more information.

7.2.3 Vouchers given away

This is a general guide to treatment, the actual treatment will depend on the circumstances and the terms and conditions of the issue of the vouchers.

Details Accounting procedures
Single purpose vouchers issued by you to customers making a specific purchase or purchases No VAT is due upon issue and no further VAT is due when the voucher is used by the customer to obtain the reward goods. However, if the consideration for the purchase may need to be apportioned between the primary and the reward goods. Notice 700/7 has more information.
Single purpose vouchers issued freely by you See paragraph 6.11.
Multi purpose vouchers issued freely by you No VAT is due upon issue. When the voucher is redeemed for goods or services the normal Multi purpose voucher valuation rules will apply. See section 9.5 of Notice 700/7.
Vouchers issued by another person but redeemable with you They’re likely to be subject to the terms and conditions of that person’s promotion. For example, you may be given certain stocks to give away on behalf of that person. These stocks must not be included in your retail scheme calculations. Notice 700/7 has more information. Alternatively, contact VAT general enquiries.

7.3 Vouchers redeemed for cash with you

If you redeem vouchers for cash, the cash payment is outside the scope of VAT. You must not alter your DGT by the cash paid out.

7.4 Goods linked in a promotion

It’s necessary to distinguish between business promotions where the supplier or sponsor contributes in whole or in part to the cost of the promotion, and those which are wholly sponsored by the retailer. This affects both how you treat your DGT and how you carry out the rest of the calculation.

Third party sponsorship payments for a promotion must be included in the DGT.

7.4.1 Types of promotion

Main types of promotions are where two different articles are sold for a single price in a combined offer, for example a:

  • washing machine with an iron
  • jar of coffee with a packet of chocolate biscuits

A number of the same articles are sold in a multibuy offer, for example buy:

  • two and get another free
  • a sandwich and get a free can of drink

7.4.2 Promotional goods having the same liability

If all the articles are liable to VAT at the same rate of tax and these are your minority goods, you must adjust your ESP accordingly.

7.4.3 Promotional goods having mix of liabilities

If the articles are liable to VAT at different rates of tax then you must apportion the payment received for them, to determine the ESP of the minority goods, and adjust your ESP accordingly:

  • you may use the method explained in Notice 700
  • in the case of goods linked by the manufacturer, you may treat the articles in accordance with the information shown on the supplier’s invoice (for example, if the invoice shows separate prices and amounts of tax, you may apportion your selling price on the same basis)

7.4.4 Correcting ESP

Paragraph 7.4.4 has the force of law.

You will need to adjust your ESP if the contribution is for the class of goods which you have marked up in your retail scheme.

If you receive from the supplier or sponsor:

  • a full contribution, do not adjust your ESP
  • a partial contribution, adjust your ESP for the appropriate goods to the extent of the amount not supported by the sponsor or manufacturer
  • no contribution, make an appropriate adjustment to the ESP of the promotion goods

7.4.5 Accounting for third party payments

When you receive a contribution from a manufacturer or joint sponsor representing partial payment for goods supplied to a customer, you should account for this in the period the goods are supplied.

But as a concession, you may account for such contributions in the period they are received from the manufacturer or joint sponsor.

If a manufacturer or joint sponsor contributes, for example, towards advertising, you have made a separate supply of services and this must be dealt with outside your retail scheme.

7.4.6 Liability

A retail scheme cannot alter the VAT liability of the elements to a linked supply, it just provides a mechanism for calculating the VAT due. Any changes to the liability must be agreed outside of the scheme.

For example, as a concession, where the minor article satisfies the criteria set out in Notice 700/7, you may account for VAT on the minor item at the same rate as the main article.

8. Appeals

8.1 Disagreeing with a decision made by HMRC

If you disagree with a decision made by us, you can ask for it to be reconsidered.

8.2 If you are still not satisfied

You can also appeal to an independent VAT and Duties Tribunal if you are still not satisfied. Find out more information about disagreeing with a tax decision.

Your rights and obligations

Read Your Charter to find out what you can expect from HMRC and what we expect from you.

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Published 30 January 2013
Last updated 17 January 2020 + show all updates
  1. Guidance at paragraphs 6.11 and 7.2 have been updated about changes in the treatment of vouchers.

  2. First published.