The normal rule is that you identify the VAT on each supply you make. A retail scheme replaces that with a calculation you perform once for each VAT return, based on your takings for the period. That is the whole of the benefit. Everything else about VAT stays where it was.

Three things are worth being clear about before you pick a scheme.

• Your purchases are unaffected. Input VAT is still reclaimed from supplier invoices in the usual way, with the usual evidence.
• You still have to issue a proper VAT invoice if a customer asks for one, and that sale then comes out of the scheme calculation.
• The scheme is a method, so if the method produces a result that is clearly wrong for your business, HMRC can refuse it and reassess.

That last point is the one owners underestimate. A scheme is allowed because it gives a fair and reasonable answer for the way your shop trades. If your product mix shifts, say you put in a coffee machine or a hot counter, the scheme that fitted last year may now be producing a figure that nobody can defend.

Under Making Tax Digital, the records behind the calculation have to be kept digitally and the return filed from software. The scheme choice and the record keeping are two separate decisions, and both get looked at if HMRC opens a check.

HMRC publishes three standard retail schemes. You do not apply for one and you do not need permission to start.

Point of Sale Scheme

You identify and record the VAT rate at the moment of sale, so the till does the work. It needs every product coded correctly on an EPOS system, and it needs that coding maintained when new lines come in. Where the till is accurate, this gives the truest figure of the three, and it is the scheme most convenience stores with a modern system should be on.

Apportionment Scheme

Built for retailers who buy goods in and sell them on unchanged. You work out the proportion of your purchases that were standard rated and apply that split to your takings. It suits a shop whose till cannot split rates reliably. The weakness is that it assumes you make the same margin on zero rated and standard rated goods. If your markup on standard rated lines is higher, the scheme understates your VAT. If it is lower, you overpay. There is also an annual adjustment to even out seasonal swings.

Direct Calculation Scheme

This one works where a small slice of your sales is at one rate and the bulk is at another. You calculate the expected selling prices of the minority goods and work the VAT from there. A shop selling mostly zero rated groceries with a small standard rated range is the classic case.

Above £130 million of turnover excluding VAT you have to agree an individual scheme directly with HMRC, which is not territory most independent retailers will ever reach.

Every retail scheme runs off your daily gross takings, usually shortened to DGT. This is the record of all your retail supplies for the day, and it is the figure that feeds the output tax calculation.

The common error is treating cash in the till as takings. They are different numbers. DGT is what you supplied, so it includes card payments, vouchers, and sales where the money arrived later or never arrived at all. Cash counted at close of play has already been affected by floats, drawings, payouts and whatever came out of the drawer for the window cleaner.

What a solid DGT record looks like in a shop:

• A Z reading or equivalent till report for each trading day, kept and readable.
• A daily figure written up, with any sales rung up outside the till added in.
• A note of any adjustment, with the reason, so a stranger can follow it six months later.
• Digital records under Making Tax Digital, with the link from till to software intact.

If the VAT rate changes part way through a period, you have to split the period and run two calculations, one on the supplies before the change and one after, then add them. That has happened twice in recent memory with hospitality, so it is worth knowing it exists.

When HMRC runs a VAT check on a shop, the DGT record is where they start. Till rolls that stop halfway through a quarter are the fastest way to turn a routine check into something longer.

A retail scheme covers your retail supplies. Plenty of what goes across a shop counter is not a retail supply, and putting it through the scheme skews the figure in both directions.

Things that normally sit outside and get accounted for separately:

• Paypoint, bill payment and utility top-up income. You are being paid commission for a service, so the gross amount passing through is not your takings.
• National Lottery and scratchcard sales, where again only the commission is yours.
• Sales you invoice to another business, including anything where the customer asked for a VAT invoice.
• Post Office counter income, where you operate one.
• Goods sold under a margin scheme, such as second-hand items.
• Catering sales in many cases, which the next section covers.

The practical problem is that the till rings all of this up together. If the Paypoint terminal is separate and the cash goes in the same drawer, the daily figure quietly inflates and the VAT follows it up. We have seen shops paying VAT on bill payment money that was never theirs, quarter after quarter, because nobody separated the two at the till.

Fix it at the point of sale rather than in the accounts. Set a separate till department or key for each income type that is not a retail supply, and have whoever cashes up write the figures down in the same order every day. That one change makes the quarterly VAT return a ten minute job instead of an argument with a carrier bag of receipts.

Catering is treated separately, and takeaway owners get caught by this more than anyone. HMRC’s position is that catering sales should normally be accounted for under the Point of Sale Scheme, because a till can tell hot from cold at the moment the order is taken.

There is an adaptation available, but the conditions are specific. You have to satisfy HMRC that you are unable to operate Point of Sale. You need reasonable grounds for believing your taxable retail catering sales, excluding VAT and counting reduced, standard and zero rated together, will stay under £1 million over the next twelve months. The method also has to give a fair and reasonable result in every period, not just on average.

If you meet those conditions you write to HMRC. Usually they do no more than acknowledge the letter, and you can start using the adaptation once that acknowledgement lands.

The mechanics are straightforward once set up. You establish what percentage of your catering takings is standard rated and what percentage is reduced rated, apply those percentages to your daily gross takings, then apply the VAT fraction: one sixth where VAT is 20 per cent, and one twenty-first where it is 5 per cent.

Two rules trip people up. The percentage has to come from a sample of your actual sales over a representative period, and you keep the sample details including dates and times. And you redo the calculation every tax period. You cannot lift the percentage the previous owner used when you bought the shop, which is exactly what happens when a takeaway changes hands and the paperwork comes with it.

Retail schemes sit alongside some other VAT schemes and clash with one.

• You can run a retail scheme with the Cash Accounting Scheme.
• You can run one with the Annual Accounting Scheme.
• You cannot run one with the Flat Rate Scheme. The Flat Rate Scheme has its own calculation, so there is nothing for a retail scheme to do.

Joining is informal. You start at the beginning of a VAT period and you do not have to tell HMRC which scheme you have chosen. Leaving works the same way: you stop at the end of a period. The one exception is turnover above £130 million excluding VAT, where you have to come out immediately and agree an arrangement with HMRC.

Once you have joined a scheme you are expected to stay with it for a year before moving to a different one. That stops businesses hopping between methods to pick whichever produces the lowest figure each quarter, and HMRC will notice if you try.

How to use this VAT schemes for retailers guide when your shop changes

The trigger for a review is a change in what you sell or how you ring it up. New EPOS, a hot food counter, a second store, a franchise conversion, a big shift in your zero rated to standard rated mix: any of those can make your current scheme the wrong one. Run the numbers under your current method and under the alternative for a full quarter, compare, and make the change at the start of the next period if the alternative is both more accurate and workable for your staff.