Mechanics of the standard retail schemes: Method of setting ESPs
There is no set method of working out ESPs, but the retailer must be consistent in the method used and must keep the working papers detailing the method and the adjustments made. The most common methods of setting initial ESPs (ie before adjustments for losses, pilferage, non-retail sales, etc) are:
- by marking up each line of goods - this is the most accurate method but can be burdensome;
- by marking up each class of goods: this can only be used if the retailer cannot use a. above, perhaps because they sell a very large number of different lines. The method should only be used where the variation in mark-ups between goods in a particular class does not exceed 10% and requires the mark-up to be reviewed each quarter. If this method is used, the officer must be satisfied that the classes of goods are genuine and have a commercial basis;
- by using the recommended retail prices as shown on the suppliers’ invoices or other documentation.
In general, the revenue effect of incorrect ESPs is likely to be greater in a direct calculation scheme than in an apportionment scheme and this is reflected in the more precise rules inNotice 727/5 Retail schemes: How to work the Direct calculation schemes.
Remember, ESPs are never likely to be completely accurate but, in order for the retail scheme to produce a fair and reasonable result, those ESPs must be realistic. Whilst it may be reasonable to expect a large retailer with sophisticated computer systems and detailed management information to make a wide range of adjustments, this may be unreasonable in the context of a small but busy corner shop run by a sole proprietor. In all cases, officers reviewing a retailer’s ESPs should consider the effect on the revenue if certain ESPs are overstated, and action as appropriate.