How does the VAT retail scheme work?
Answered 11 March 2026
How the VAT Retail Scheme Works
HMRC Guidance / Practice
Purpose and Who It Is For
Retailers are required to use one of the VAT retail schemes to calculate the value of their supplies at each rate of VAT. The schemes exist because retailers cannot reasonably be expected to account for VAT normally (i.e. transaction by transaction) when selling large volumes of goods to the public at mixed VAT rates.
Turnover Limits
- Retailers whose annual taxable retail turnover does not exceed £130 million can generally choose from a range of standard published schemes.
- Retailers above £130 million must formally agree a bespoke scheme individually with HMRC.
- The turnover limit applies to the VAT registration as a whole — so a VAT group with combined turnover above £130 million must use a bespoke scheme even if individual entities are below the limit.
- Some simpler schemes (other than Point of Sale) have lower turnover limits — for example, Apportionment Scheme 1 is restricted to retailers with tax-exclusive retail turnover not exceeding £1 million.
The Standard Schemes
There are three main types of standard retail scheme:
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Point of Sale Scheme (Notice 727/3) — VAT is identified and recorded at the point of sale for each transaction. This is the most accurate method and is suitable where tills can identify the VAT rate of each item.
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Apportionment Schemes (Notice 727/4) — VAT is calculated by apportioning total takings based on the ratio of purchases at each VAT rate. Scheme 1 (the simpler version) cannot be used for supplies of services, goods made or grown by the retailer, or catering.
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Direct Calculation Schemes (Notice 727/5) — VAT is calculated by reference to the expected selling prices (ESP) of goods at minority VAT rates, with the balance attributed to the other rate(s).
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Bespoke Schemes (Notice 727/2) — Tailor-made agreements between large retailers (turnover >£130m) and HMRC, often based on a standard scheme but adapted to the retailer's specific systems.
Key Operational Points
- Daily Gross Takings (DGT) are central to all retail schemes. Retailers must keep a digital record of their DGT.
- Normally, a retailer uses a single scheme for the whole business, but more than one scheme may be used (e.g. at separate locations), as permitted by Regulation 69 of the VAT Regulations 1995.
- Acceptable combinations include, for example, the Point of Sale scheme used alongside a Direct Calculation or Apportionment scheme. However, different versions of the Direct Calculation scheme cannot be used simultaneously, and a Direct Calculation scheme cannot be mixed with an Apportionment scheme.
- Each scheme's specific rules have the force of law and are set out in the individual scheme notices.
Citation sources
This notice does not tell you in detail how to operate each scheme. You can find further information on individual schemes in notices: 727/2 Bespoke retail schemes 727/3 How to work the point of sale scheme 727/4 How to work the apportionment schemes 727/5 How to work the direct calculation schemes Each scheme has specific rules and turnover limits which have the force of law and are set out in the individual scheme notices. You can get further advice by contacting the VAT: general enquiries hel
Retailers who: cannot reasonably be expected to account normally and whose annual taxable turnover in retail sales does not exceed £130 million can generally choose from a range of standard public schemes. There are lower turnover limits for the simplest schemes (other than point of sale). If a retailer who has an annual taxable retail turnover exceeding £130 million wants to use a retail scheme, they must formally agree a bespoke scheme with HMRC. Retailers who are able to account normally and
The turnover restriction on the use of published retail schemes to businesses with a tax exclusive retail turnover below £130 million per annum is provided within tertiary legislation. Notice 727 VAT retail schemes and Notice 727/2 Bespoke retail schemes provide further information. Retailers with an annual tax exclusive retail turnover of above £130 million who wish to use a retail scheme are required to agree a scheme individually with the Commissioners. Such schemes are called bespoke because
This notice tells you about the Point of Sale Retail Scheme, one of the standard retail schemes. It explains the general rules applicable to the scheme, how the scheme works (including the calculation of VAT), and what records you should keep, especially your daily gross takings (DGT) record.
If possible, you should carry out physical stock taking. Otherwise, you may use the ESP of the goods you received for retail sale in the 3 months before you started to use the scheme. The following text and table has the force of law. When you start to use the scheme, you must establish the ESP of your opening stock of goods for retail sale at each rate as follows: Step Calculation Amount Step 1 Work out the ESP, including VAT, of standard-rated goods for retail sale in stock. £__ Step 2 Work ou
Retailers have always been able to agree or adapt a method with HMRC (under Regulation 67(1) and (2) of the VAT Regulations 1995 [SI 1995/2518]). Such agreements have largely developed as a result of particular difficulties/complexities within individual retailers’ businesses/systems and may not have been formally recorded. This has led to misunderstandings and has given neither party the necessary certainty as to how the scheme operates. If they wish to use a retail scheme, retailers with an an
Retailers are required to use one of the VAT retail schemes to calculate the value of their supplies at each rate of VAT. Detailed guidance on retail schemes can be found in the following notices: Retail schemes (VAT Notice 727) Bespoke retail schemes (VAT Notice 727/2) Point of Sale Retail Scheme (VAT Notice 727/3) How to use the VAT retail Apportionment Scheme (VAT Notice 727/4) Direct calculation retail schemes (VAT Notice 727/5) The relevant notice for each retail scheme contains a step-by-s
The scheme is relatively simple. But if, on average, you achieve a higher mark-up for your zero-rated goods than your reduced or standard-rated goods, you may find that you pay more VAT if you use apportionment scheme 1 than you would using another scheme. Also you: can only use the scheme if your total tax exclusive turnover from retail sales does not exceed £1 million cannot use the scheme for supplies of services, for supplies of goods which you have made or grown yourself or for supplies of
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 yo
Normally, a retailer will use a single retail scheme for the whole of his business. Retailers involved in supplying both goods and services may need to use more than one scheme. In addition, retailers with a number of separate business locations or different types of shops may prefer to use either a number of different schemes in each location or even the same scheme. This is provided for in law by virtue of Regulation 69 of the VAT Regulations 1995, which enables HMRC to allow more than one sch