Retail VAT Schemes Compared: Point of Sale, Apportionment and Direct Calculation

If you run a shop that sells goods at more than one VAT rate and you do not issue an invoice for every sale, you have a choice of three methods for working out the VAT inside your takings: point of sale, apportionment and direct calculation. They are set out in VAT Notice 727 and its sub-notices. They are not interchangeable. Run over the same quarter of trading they produce three different VAT bills, and the gap is real money.

The three schemes as a live choice

Scheme	How the split is made	Turnover gate	Suits a shop where
Point of sale	The till identifies the rate at the moment of sale, so takings arrive already split	Up to £130 million of annual retail turnover; above that a bespoke scheme is mandatory	Every line is barcoded and rate-coded in the till system
Apportionment (Scheme 1)	Total takings split by the ratio of purchases for resale at each rate	Tax-exclusive retail turnover up to £1 million	Purchases are cleanly recorded but the till cannot separate rates
Apportionment (Scheme 2)	As Scheme 1, with the notice's fuller method and an annual adjustment	Up to £130 million	The same, at larger scale
Direct calculation (Scheme 1)	Minority-rate goods marked up to expected selling prices; the balance of takings falls to the other rate	Tax-exclusive retail turnover up to £1 million	One rate covers only a small, easily priced part of the range
Direct calculation (Scheme 2)	As Scheme 1, plus an annual stock adjustment	Up to £130 million	The same, at larger scale or with volatile stock

Those turnover limits come from VAT Notice 727 and were re-checked against the notice on 25 August 2026. Two points about them are easy to miss. The £1 million and £130 million figures are tax-exclusive retail turnover, not total business turnover, so wholesale or trade-counter sales that carry a full VAT invoice sit outside the measurement. And the £130 million line is not a preference: above it, a bespoke retail scheme agreed with HMRC is compulsory, which is a conversation almost no independent shop will ever have.

Below the gates, the choice is yours to make and it is a calculation, not a category. Nothing about being a convenience store, a bakery or a garden centre puts you on one scheme rather than another. What decides it is your own numbers, run through all three.

One shop, one quarter, three answers

Bridget runs a mixed-goods shop in Basingstoke. She is VAT registered, well above the £90,000 registration threshold that applies once taxable turnover passes that figure in any rolling 12 months. Her quarter looks like this, and every calculation below uses these same numbers.

Figure for the quarter	Amount
Gross takings, VAT inclusive	£120,000
Purchases for resale, zero rated (cost, excluding VAT)	£54,000
Purchases for resale, standard rated (cost, excluding VAT)	£30,000
Total purchases for resale	£84,000
Takings her till separates as standard rated	£42,000
Takings her till separates as zero rated	£78,000

Groceries, most cold food and children's clothing are zero rated. Confectionery, crisps, soft drinks, hot food, alcohol, cleaning products sit at the standard rate of 20%, unchanged and still current when this page was checked in August 2026. Domestic fuel and a short list of other supplies sit at the reduced rate of 5%. Bridget sells nothing at the reduced rate, which keeps the arithmetic to two rates.

One number does all the work in every scheme below. VAT at 20% is one sixth of a VAT-inclusive price, because 20 is one sixth of 120. That is the VAT fraction. For the 5% reduced rate the fraction is one twenty-first. Whichever scheme you use, the last step is the same: take the takings you have identified as standard rated and divide by six.

Point of sale: the till does the splitting

Under point of sale you make no estimate at all. Each item is rate-coded in the till system, so at the end of the day the till has already told you how much of the money in the drawer relates to standard-rated goods.

Bridget's till separates £42,000 of standard-rated takings for the quarter.

• Standard-rated gross takings: £42,000
• Output VAT: £42,000 divided by 6 = £7,000.00
• Zero-rated takings: £78,000, output VAT nil

The accuracy is the point and so is the condition attached to it. Point of sale is only as good as the rate coding behind every barcode. A new line entered on the wrong rate, a manual price key that defaults to standard, a promotional multibuy that mixes rates in one button: each of those quietly moves the answer, and because the till reports a precise figure the error looks like a fact. If you use point of sale, the maintenance job is not the VAT return, it is the product file.

Apportionment: your takings split the way your buying splits

Apportionment assumes that the mix of what you sell mirrors the mix of what you bought. You take the cost of goods purchased for resale at each rate, form a ratio, and apply that ratio to total takings.

Bridget bought £30,000 of standard-rated goods out of £84,000 of purchases for resale.

• Standard-rated proportion: £30,000 / £84,000 = 0.357142857
• Takings treated as standard rated: £120,000 x 0.357142857 = £42,857.14
• Output VAT: £42,857.14 divided by 6 = £7,142.86

That is £142.86 more than point of sale gave on the same trading. The reason is straightforward: apportionment is driven by cost, and Bridget's standard-rated lines carry a slightly lower markup than her zero-rated ones, so measuring by purchase cost overstates their share of the till.

Apportionment has two structural weaknesses worth naming before you adopt it. It ignores wastage and shrinkage, so goods bought and never sold still push takings into their rate. And it ignores differences in markup between rates, which is exactly what moved Bridget's figure. Where a shop marks up its standard-rated impulse lines harder than its zero-rated staples, apportionment will understate the VAT rather than overstate it, and the correction when it is found is a bill rather than a refund. Notice 727 also requires that a purchase-based method uses goods purchased for resale, so consumables, packaging, equipment and anything not going onto the shelf must be excluded from both sides of the ratio.

Direct calculation: price up the smaller side of the range

Direct calculation reverses the question. Instead of splitting everything, you work out what the goods at the minority rate would sell for, treat that as your takings at that rate, and let the balance of the takings fall to the other rate. In Bridget's shop the standard-rated goods are the minority side by cost, so those are the ones she prices up.

She takes her standard-rated purchases for resale and uses the markup she applies to that range when she prices it, 45%.

• Cost of standard-rated goods bought for resale: £30,000
• Expected selling prices: £30,000 x 1.45 = £43,500
• Output VAT: £43,500 divided by 6 = £7,250.00
• Takings treated as zero rated: £120,000 - £43,500 = £76,500

The gap between the 45% price list and the 40% the till actually realised is exactly the drift Scheme 1 has no annual adjustment to correct.

The attraction is that you only have to keep detailed records for the smaller part of the range. The exposure is that the whole answer hangs on the markup you claim, and on it being the markup you really charge. If prices are cut, if a promotion runs at cost, or if the minority-rate stock does not actually sell through, the expected selling price stops matching the money in the till.

Direct Calculation Scheme 1 has no annual stock adjustment, which is what keeps it simple and also what makes drift build up unnoticed. Scheme 2, the version available up to £130 million, does require an annual stock adjustment, and that adjustment is precisely the mechanism that pulls the estimate back to reality.

Reading the three answers

Scheme	Standard-rated takings identified	Output VAT for the quarter	Difference from point of sale
Point of sale	£42,000.00	£7,000.00	baseline
Apportionment Scheme 1	£42,857.14	£7,142.86	£142.86 more
Direct Calculation Scheme 1	£43,500.00	£7,250.00	£250.00 more

Two things follow from that spread. The first is scale: £250 a quarter is £1,000 a year on a shop turning over roughly £480,000 gross, which is not a rounding error on an independent retailer's profit. The second is direction. On these numbers point of sale gives the lowest figure, but that is a fact about Bridget's markups, not a rule. Reverse the markups so that the standard-rated lines carry the heavier margin and apportionment produces the lowest figure of the three while understating what the till actually took, which is the worst of both outcomes.

So the honest way to choose is to run your own last four quarters through all three methods before you adopt one, and to check that the method you pick can be evidenced from records you genuinely keep. Where the numbers are close, take the one with the cleanest audit trail. Where they are not close, understand why before you take the cheaper answer, because a large gap is usually a signal that one method's assumption does not hold in your shop. That is a conversation to have with your accountant with the figures in front of you, not a decision to make from a description of the schemes.

Where the rate boundary actually bites in a mixed-rate shop

Scheme arithmetic is downstream of rate classification. If a line is coded to the wrong rate, every scheme carries the error forward, and the classic errors in a food-selling shop cluster in a few places.

• Confectionery and biscuits. Chocolate-covered biscuits are standard rated; a plain biscuit or a cake is zero rated. The distinction between the two has been litigated for decades and is still where the boundary is thinnest.
• Hot food. Food supplied hot for immediate consumption is standard rated regardless of what it is. The same item sold cold from a chiller can be zero rated.
• Eat in versus take away. Anything consumed on premises is standard rated, so a counter with two stools changes the answer for the items sold at it.
• Drinks. Soft drinks, bottled water and alcohol are standard rated. Milk is zero rated, and so are packets of tea, coffee and cocoa. A hot drink served to take away is standard rated whatever it is, because hot food and drink supplied for consumption off the premises is a supply in the course of catering.
• Snacks. Crisps and similar savoury snack products are standard rated, while many bakery items are not.

A shop with a bakery counter or a hot cabinet is running the mixed-rate problem in its hardest form, which is why the scheme choice matters most there. The manufacturing side of the same boundary, where the rate is set at production rather than at the shelf, is covered separately on our page for food and drink manufacturers.

Daily gross takings: the record every scheme sits on

All three schemes compute VAT from one input, your gross takings, so the takings record is the evidential floor. Notice 727 requires it to be made daily and kept for six years. A record that holds up contains, for each trading day:

• The till reading or Z-reading, with the till roll or its electronic equivalent retained.
• Cash counted, cash banked, and any difference explained rather than absorbed.
• Card and contactless settlement, reconciled to the merchant statement rather than assumed.
• Refunds, voids and no-sales, recorded as they happen with a reason, not netted off at the end of the day.
• Anything that left the shop without ringing through the till: staff sales, own consumption, wastage, promotional giveaways and goods taken for personal use.

That last line is the one most often missing, and it is not a technicality. Goods taken out of the business for personal use are a supply, and the takings record is where the adjustment starts. Under Making Tax Digital for VAT, which has applied to all VAT-registered businesses since April 2022, the daily totals also have to travel to your return through digital records and compatible software rather than a retyped figure, so the takings record and the accounting system need to be joined rather than merely consistent.

Tills and EPOS systems as accounting records, not just shop kit

An electronic point of sale (EPOS) system is doing three separate jobs at once, and it is easy to buy one on the strength of the first and be let down by the third:

• Selling. Speed at the counter, promotions, loyalty.
• Stock. Unit movement, reorder levels, and the data behind a real gross margin by department.
• Tax. Rate coding per product line, a retained daily Z-reading, and an export your bookkeeping software can consume digitally.

Before you commit to point of sale as your scheme, confirm the third job specifically. Ask whether every product line carries an explicit VAT rate rather than a store default, whether the system reports standard-rated and zero-rated takings separately for any date range, whether Z-readings are retained and immutable for six years, and whether the export reaches your accounting software as a digital link. If any of those answers is no, apportionment or direct calculation may be a better fit than a point of sale scheme your equipment cannot actually evidence.

Reconciling the till is the routine that makes all of it real: till reading against cash counted, cash counted against cash banked, card totals against the merchant statement, and the daily total against what the bookkeeping shows. Differences are normal in a cash shop. Unexplained differences that repeat in the same direction are the ones to chase, because a persistent one-way drift is usually a process fault rather than a counting error.

What HMRC looks at in a cash retail business

Cash businesses attract questions because cash is unevidenced by default, not because a shop is presumed to be doing anything wrong. What resolves the questions is the record described above, which is why keeping it well is a practical matter rather than a defensive one.

Where a takings record is complete, the review is short: the till rolls support the daily totals, the daily totals support the return, and the retail scheme calculation is repeatable from the underlying purchase or till data. Where it is not, HMRC can and does estimate, often by testing markups on a sample of lines and comparing the implied takings with the declared ones. A gap then has to be explained with whatever evidence survives, which is a far weaker position than simply having the record.

Two habits carry most of the weight. Keep the till roll or its electronic equivalent, because a summary figure with no underlying data is the single most common gap. And record the non-till movements as they happen, because staff sales and own consumption reconstructed a year later are an estimate rather than a record.

Stock, and what a retail scheme does not do

A retail scheme computes output VAT. It does not value your stock, and the two calculations answer different questions in different places.

Stock for your accounts is valued at the lower of cost and net realisable value, on the year-end count, and it drives your gross profit and your taxable profit. A retail scheme figure is a VAT computation on takings and belongs on your VAT return. A shop that reconciles them, so that a stock count is checked against what the scheme implies has been sold, gets an early warning of both shrinkage and rate-coding errors. A shop that treats them as one number will eventually report a margin it cannot explain. Stock valuation and the year-end position are covered on our page on accounting for retail shops, and the daily operational side, including wastage and staff sales, on the page for convenience stores.

Retail schemes are not the flat rate scheme, and not cash accounting

These three things get confused often enough to be worth separating in one place.

A retail scheme works out how much output VAT is inside mixed-rate takings. You still reclaim your input VAT in the ordinary way. The Flat Rate Scheme replaces that calculation altogether: you pay a single percentage of VAT-inclusive turnover and give up most input VAT recovery, and it is open to businesses expecting taxable turnover of £150,000 or less excluding VAT. It is a different mechanism for a different problem, and it is set out on our page on the VAT Flat Rate Scheme.

The cash accounting scheme is different again: it changes the timing of VAT, so you account on payments received and made rather than on invoice dates. You can join with taxable turnover of £1.35 million or less and must leave once it exceeds £1.6 million. For a shop paid at the counter it usually changes little, since the sale and the payment are the same event, though it can help where you also invoice trade customers.

Once your figure is computed, it goes onto the return in the ordinary way, which is covered on our guide to completing a VAT return.

Joining, changing and leaving a retail scheme

You do not apply to use a standard retail scheme. You adopt it, record which one you are using and from when, and use it consistently. Four practical rules follow.

• Use one scheme for the whole business unless the notice permits otherwise for genuinely separate parts of a trade, and document any split.
• Do not switch to bank a better answer. HMRC expects a scheme to run for a reasonable period, normally to the end of a VAT year, and switching in response to a favourable calculation invites the question of why.
• Watch the gate as you grow. Cross £1 million of tax-exclusive retail turnover and Scheme 1 of apportionment or direct calculation is no longer available to you, so the move to Scheme 2 has to be planned rather than discovered.
• If the answer is materially wrong, correct it. A retail scheme is a method of computation, and a method that stops reflecting your trade needs changing rather than defending.

If you can issue a VAT invoice for every sale, you do not need a retail scheme at all, and you should not use one. The schemes exist for the shop that cannot, which is most of them.

Where to start

Take one recent quarter, pull the gross takings, split your purchases for resale by rate, and run all three calculations exactly as they are set out above. If the answers cluster within a few pounds, take the one your records support best and stop thinking about it. If they spread the way Bridget's did, the question worth asking is which assumption is failing in your shop, because the answer to that usually improves the accounts as well as the VAT return.

If you want that run against your own figures, get in touch and we will work all three on a quarter of your trading.