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VAT retail schemes are a special set of schemes used by retail businesses to account for VAT.  The schemes are used by businesses that sell a significant amount of low value and/or small quantity items to the public with different VAT liabilities.

The use of the schemes can save businesses a significant amount of time in calculating the amount of VAT due to HMRC. In many circumstances, it would be extremely difficult for these businesses to account for VAT using standard VAT accounting. By using the VAT retail scheme, retailers can calculate VAT due to HMRC at the standard, reduced and zero rates of VAT as a proportion of sales. Usually this is done on a day-by-day basis.

There are 3 standard VAT retail schemes:

• Point of Sale Scheme
• Apportionment Scheme
• Direct Calculation Scheme

There is also the option of using a bespoke scheme. The use of a bespoke scheme is obligatory for retailers with a turnover excluding VAT of £130 million or more. The decision as to which retail scheme is to be used is usually driven by a combination of looking at the scheme that provides the best result for the business in question combined with the cost of using the scheme, with the important caveat that HMRC consider that the chosen scheme is fair and reasonable.

HMRC’s guidance on the 3 standard schemes and the bespoke scheme has recently been updated to include information about changes to the treatment of vouchers.

Distance selling is the term used to describe supplies of delivered goods from one EU Member State to a customer in another member state who is not registered for VAT. 

The recipients of most distance sales will be private individuals, but they can also include small, unregistered businesses, businesses making only exempt supplies, charities and public bodies.

Following the Brexit terms, distance selling can still occur on the movement of goods between the EU and Northern Ireland. Under the terms of the agreement there can be distance selling for VAT purposes when a business supplies and delivers goods to a customer who is not registered for VAT from:

• an EU country to Northern Ireland
• Northern Ireland to an EU country
• one EU country to another EU country

The UK distance selling threshold is £70,000 per calendar year. If the value of a supplier’s distance sales into Northern Ireland is under this level, then VAT should be charged at the rate that applies in the seller's home country. If the value of the distance sales goes over the threshold the supplier must register for UK VAT and start accounting for UK VAT. They may also apply for a voluntary registration if their sales are under £70,000 in the calendar year.

The distance selling rules are intended to combat distortion of trade and unfair competition by transferring the place of supply to the Member State in which the customer receives the goods.

Businesses that deferred VAT payments last year have until 21 June 2021 to join the new online payment scheme. This would allow them to spread the cost of repayment over a number of months. The VAT deferral scheme is open to businesses that took the option to defer the payment of their VAT liabilities between 20 March 2020 and 30 June 2020. 

Under the scheme, businesses have the option to pay their deferred VAT in smaller payments over a longer period and interest free. Instead of having to repay the full amount by 31 March 2021, businesses can make smaller interest-free payments during the 2021-22 financial year and complete payment of any arrears by 31 March 2022. 

The maximum number of instalments allowed under the scheme is based on the date businesses sign up for the scheme. The first instalment must be paid on joining the scheme. The March, April and May joining dates have passed but businesses that join by 21 June 2021 (the last available date) can pay in eight instalments.

Businesses must also meet certain conditions to use the scheme including being up to date with their VAT returns. HMRC has confirmed that businesses may be charged a 5% penalty or interest if they do not pay the VAT in full, sign up to the scheme or arrange to pay by 30 June 2021.

When a VAT registered business issues an invoice to their customer, they must ensure that they charge the correct rate of VAT. Whilst most businesses in the UK charge VAT at the standard rate of 20% there are a number of different VAT rates and exemptions to be aware of; this includes the reduced VAT rate of 5% and the positive zero rate (0%).

There are two other categories that the supplies of goods and services can fall under:

• Exempt – where no VAT is charged on the supply. Examples of exempt items include the provision of insurance, postage stamps and health services provided by doctors. If a business only sells VAT-exempt goods and services, they cannot register for VAT.
• Supplies that are 'outside the scope' of the UK VAT system altogether. These supplies are beyond the realm of the UK VAT system and you cannot charge or reclaim VAT on these supplies. Examples include goods or services you buy and use outside the EU, statutory fees – like the London congestion charge and goods you sell as part of a hobby.

If a business has made an error in charging VAT, then this needs to be corrected. The timing of finding an error can impact on how the issue is resolved.

There are also penalties if you charge VAT to your customers before you are officially registered. VAT registration is only required for eligible businesses earning more than £85,000 per year although businesses under the threshold can voluntarily apply for a VAT registration.

VAT is chargeable on standard goods and services when these are offered by a registered VAT business.

The standard rate of VAT is 20% however there are different VAT rates and exemptions that available.  In the UK, there are three different VAT rates, the standard rate @ 20%, the reduced rate @ 5% and the zero rate @ 0%.

The VAT rules are even complex in various circumstances for example when there are discounts or free gifts which are quite normal these days.

Have a look at our VAT Services.

https://www.gov.uk/vat-businesses/discounts-and-free-gifts

We have summarised the main aspects of VAT treatment in various situations:

Discounts and free gifts

If you are looking to know about VAT, feel free to contact us.

Where an error on a past VAT return is uncovered, businesses have a duty to correct the error as soon as possible. As a general rule, any necessary adjustment can be made on a current VAT return. However, in order to be able to do so, there are three important conditions that must be met:

1. The error must be below the reporting threshold.
2. The error must not have been deliberate.
3. The error can only relate to an accounting period that ended less than 4 years ago.

Under the reporting threshold rule, businesses can make an adjustment on their next VAT return if the net value of the errors is £10,000 or less. The threshold is further increased if the net value of errors found on previous returns is between £10,000 and £50,000 but does not exceed 1% of the box 6 (net outputs) VAT return declaration figure for the return period in which the errors are discovered.

Value Added Tax errors of a net value that exceed the limits for correction on a current return or that were deliberate should be notified to HMRC using form VAT 652 (or providing the same information in letter format) and should be submitted to HMRC’s VAT Error Correction team.

HMRC can also charge penalties and interest if an error is due to careless or dishonest behaviour.

The VAT Flat Rate Scheme is designed by HMRC to help and simplify the VAT Return process for small businesses. The scheme is aimed to ensure that businesses pay roughly the same amount of VAT without having to complete as much paperwork as other VAT schemes.

Using the VAT Flat Rate scheme, businesses pay VAT as a fixed percentage of their VAT inclusive turnover. The actual percentage used depends on the type of business. The scheme has been designed to simplify the way a business accounts for VAT and in so doing reduce the administration costs of complying with the VAT legislation.

The scheme is open to businesses that expect their annual taxable turnover in the next 12 months to be no more than £150,000, excluding VAT. The annual taxable turnover limit is the total of business sales during the year. It includes standard, reduced rate or zero rate sales and other supplies. It excludes the actual VAT charged, VAT exempt sales and sales of any capital assets.

Have a look at our VAT Services page for details.

Who can’t join the scheme?

You cannot join the Flat Rate Scheme if:

• you have previously been registered and only came out of the scheme in the last 12 months;
• you are, or were, within the previous 24 months, registered for VAT as the division of a larger business, or as part of a group, or you were eligible to do so;
• you use one of the margin schemes for second-hand goods, art, antiques and collectibles, the Tour Operators’ Margin Scheme, or the Capital Goods Scheme;
• you have been convicted of a VAT offence or charged a penalty for VAT evasion in the last year; or
• your business is closely ‘associated’ with another business.

As part of an annual review, it may be advisable to check that clients using the scheme continue to qualify. Businesses that have joined the scheme can continue using the scheme provided their total business income does not exceed £230,000 in a 12 month period. There are also special rules where increased turnover is temporary.

A limited cost trader test was introduced in April 2017. Businesses that meet the definition of a ‘limited cost trader’ are required to use a fixed rate of 16.5%. The highest ‘regular’ rate is 14.5%. If your clients meet the definition of a limited cost trader then it would be worth investigating if it would be more beneficial for them to leave the scheme and account for VAT using standard VAT accounting.

The scheme is unlikely to be beneficial for your business if you:

• Spend more on standard-rated business expenses than HMRC consider typical for your business sector;
• Regularly receive a VAT repayment under standard VAT accounting; or
• Make a lot of zero-rated or exempt sales.

Please contact us if you would like to discuss your options.

Businesses normally do care when filing their VAT returns but still there could be an error when filing a VAT return. Where an error on a past VAT return is uncovered, businesses have a duty to correct the error as soon as possible. As a general rule, any necessary adjustment can be made on a current VAT return. However, in order to be able to do so, there are three important conditions that must be met:

• The error must be below the reporting threshold.
• The error must not have been deliberate.
• The error can only relate to an accounting period that ended less than 4 years ago.

https://www.gov.uk/vat-corrections

Under the reporting threshold rule, businesses can make an adjustment on their next VAT return if the net value of the errors is £10,000 or less. The threshold is further increased if the net value of errors found on previous returns is between £10,000 and £50,000 but does not exceed 1% of the box 6 (net outputs) VAT return declaration figure for the return period in which the errors are discovered.

Please have a look at our VAT Services page.

VAT errors of a net value that exceed the limits for correction on a current return or that were deliberate should be notified to HMRC using form VAT 652 (or providing the same information in letter format) and should be submitted to HMRC’s VAT Error Correction team.

Inaccuracy penalties:

• The inaccuracy penalty, applies where there is an understatement of a VAT liability (or a false or inflated repayment claim), and
• The inaccuracy must be careless, deliberate or deliberate and concealed
• There is a further penalty if HMRC issues a VAT assessment which understates the tax due, and the taxpayer does not take reasonable steps to notify HMRC of the error within 30 days.

The penalty does not apply where the taxpayer has, in the view of HMRC, taken reasonable care in filing returns but makes an innocent mistake. Where it does apply, it is calculated as a percentage of ‘potential lost revenue’ as follows:

• Lack of reasonable care errors – up to 30% of ‘potential lost revenue’
• Deliberate errors – between 20% and 70% of ‘potential lost revenue’
• Deliberate and concealed errors – between 30% and 100% of ‘potential lost revenue’

HMRC may also charge penalties and interest if an error is due to careless or dishonest behaviour.

If you need any further advice feel free to contact us to book a free consultation.