VAT retail schemes

Retail schemes let a shop that sells to the public at more than one VAT rate work out its output tax once per return from its total takings, instead of recording the VAT on every sale. The point of sale scheme splits takings by rate at the till, the apportionment schemes split them in the same ratio as purchases for resale, and the direct calculation schemes work out the expected selling price of one class of goods and deduct it.

What is a retail scheme and who can use one?

Normal VAT accounting requires you to identify the VAT exclusive value and the VAT on every sale. That is impractical for a newsagent, pharmacy or farm shop ringing up hundreds of small mixed rate sales a day without issuing invoices. The retail schemes in VAT Notice 727 and its companion notices 727/3, 727/4 and 727/5 solve this. Parts of these notices have the force of law under regulations 66 to 75 of the VAT Regulations 1995.

The schemes can only be used for retail sales, meaning sales of goods or services to consumers. If you also sell to other businesses, those sales are accounted for normally. You must issue a VAT invoice to a VAT registered customer; Notice 727 says such sales should go through normal accounting unless they are occasional or made with a less detailed invoice.

HMRC may refuse use of a scheme if you could reasonably be expected to account normally, if the scheme does not produce a fair and reasonable result, or to protect the revenue. Retail schemes can be used alongside the cash accounting scheme and the annual accounting scheme, but not with the Flat Rate Scheme.

Which scheme can you use?

Scheme	Retail turnover limit (excluding VAT)	Basis
Point of sale	£130 million	Takings identified by rate when the sale is made
Apportionment scheme 1	£1 million	Cost of goods bought for resale at each rate
Apportionment scheme 2	£130 million	Expected selling prices of goods received, on a rolling 12 months
Direct calculation scheme 1	£1 million	Expected selling prices of one class of goods
Direct calculation scheme 2	£130 million	As scheme 1, plus an annual stock adjustment
Bespoke scheme	Above £130 million	Agreed individually with HMRC

If your retail turnover is above £130 million you cannot use any published scheme and must agree a bespoke scheme under Notice 727/2. You should contact HMRC as soon as you think you are about to cross that figure.

How does the point of sale scheme work?

You record the VAT rate of each sale when it is made, normally with an electronic till that tags each product, or by using separate tills for different rates. At the end of the period you total the daily gross takings at each rate and apply the VAT fraction: one sixth for 20% sales and one twenty first for 5% sales. Notice 727 describes it as potentially the simplest and most accurate scheme. If all your sales are at the standard rate, or all at the reduced rate, you must use it. The risk is operational: staff must key sales correctly at the busiest times, or the VAT will be wrong.

How do the apportionment schemes work?

Apportionment scheme 1 assumes your sales mix matches your purchase mix. Each period you add up the VAT inclusive cost of goods received for resale at the standard rate, at the reduced rate, and in total. The standard rate share of purchases is applied to your takings and multiplied by one sixth; the reduced rate share is applied and multiplied by one twenty first. Once a year you repeat the calculation using the whole year’s figures and pay or reclaim the difference on the return covering the end of your scheme year.

The scheme cannot be used for services, for goods you make or grow yourself, or for catering. Its weakness is margins. If you earn a higher markup on zero rated goods than on standard rated goods, the scheme attributes too much of your takings to standard rated sales and you pay more VAT than you should. A shop selling cheap standard rated sweets alongside heavily marked up zero rated food can lose out.

Apportionment scheme 2 uses the expected selling price of goods received at each rate rather than their cost, which corrects for different margins. It runs on a rolling 12 month calculation, so there is no separate annual adjustment, but you must know the expected selling price of opening stock when you start.

How does direct calculation work?

Direct calculation suits a business where most sales are at one rate and a minority at another. You calculate the expected selling price of the minority goods received for resale in the period. If the minority goods are zero rated, you deduct their expected selling price from total takings and apply one sixth to the remainder. If the minority goods are standard rated, you apply one sixth to their expected selling price directly. Reduced rate goods are calculated separately and should not be treated as the minority class. Scheme 1 may allow you to mark up the majority goods instead if that is simpler and fair.

Direct calculation scheme 2 works the same way but needs an annual stock adjustment, so you must know the expected selling price of minority goods in stock when you start. Both schemes are only as good as the expected selling prices. If prices change, goods are discounted or stock is stolen and the figures are not updated, the output tax will be wrong.

What records do the schemes depend on?

Every retail scheme relies on a record of daily gross takings: the value of all your retail supplies, not just the cash in the till. Each scheme notice contains a checklist of what the record must include, and the requirement to record it has the force of law. Notice 727 allows businesses with turnover under £1 million whose customers pay later, such as a milk round, to adjust takings for opening and closing debtors.

Can you change or leave a scheme?

You can join a scheme at the start of any VAT period without telling HMRC. You must then stay in it for a complete year from the start of the period in which you adopted it, unless you become ineligible or HMRC allows or requires an earlier change. If you become ineligible, you must stop at the end of the next complete period.

Retrospective changes are not normally allowed. Notice 727 records that the tribunals have repeatedly confirmed that tax worked out correctly under a scheme is the correct VAT for the period, and that you cannot switch schemes simply because another gives a lower figure. In exceptional cases HMRC may allow a change, with recalculation limited to four years. When you leave apportionment scheme 1 you must make a closing adjustment calculated like the annual adjustment.

How does it work with numbers?

Illustration only. A village shop has quarterly takings of £60,000. In the quarter it receives goods for resale costing £20,000 at the standard rate, £2,000 at the reduced rate and £28,000 zero rated, a total of £50,000.

• Apportionment scheme 1: standard rate output tax is £20,000 divided by £50,000, times £60,000, times one sixth, giving £4,000. Reduced rate output tax is £2,000 divided by £50,000, times £60,000, times one twenty first, giving about £114. Total about £4,114.
• Direct calculation scheme 1: the shop prices its standard rated goods and finds an expected selling price of £22,000 and reduced rate goods of £2,500. Output tax is £22,000 times one sixth, about £3,667, plus £2,500 times one twenty first, about £119. Total about £3,786.

Here the shop’s margin on standard rated goods is lower than average, so apportionment overstates its VAT. Direct calculation reflects actual prices, at the cost of more work pricing goods.

What mistakes come up most often?

• Putting sales to VAT registered business customers through the scheme instead of normal accounting.
• Using apportionment scheme 1 for catering, services or goods the business makes itself.
• Failing to make the annual adjustment or the closing adjustment.
• Recording cash banked instead of daily gross takings, which misses card sales, vouchers and shortages.
• Not updating till rate codes when a product’s VAT rate changes (see VAT rates explained).
• Staying on a £1 million scheme after turnover passes the limit.

Keep the workings for each period so the figures can be explained if HMRC opens a VAT compliance check.

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Related Accountapedia entries

• Cash accounting or Flat Rate Scheme for VAT
• Charging VAT while waiting for a VAT number
• Global accounting for second hand goods
• Should I leave the VAT Flat Rate Scheme
• What happens if you register for VAT late

Sources

• GOV.UK: Retail schemes notice 727
• GOV.UK: Vat retail schemes
• GOV.UK: How to use the vat retail apportionment scheme notice 7274
• GOV.UK: Vat direct calculation retail schemes notice 7275
• GOV.UK: Vat point of sale retail scheme notice 7273

Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.