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Poundland wins £2,150,777 VAT case

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HMRC insisted on a closing stock adjustment for Poundland’s old bespoke retail scheme, but the first tier tribunal found that no stock adjustment was necessary.

23rd Jun 2021
Independent VAT Consultant
Columnist
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There are four retail schemes in the legislation that enable retailers to calculate how much output tax they owe at the end of each VAT period, without reference to the actual split of their daily gross takings between sales at different rates of VAT. Those schemes are known as AS1 and AS2 (apportionment schemes) and DS1 and DS2 (direct calculation schemes), see VAT Notice 727.

Bespoke retail schemes

If a business has annual turnover of £100m or more, it must agree a bespoke retail scheme with HMRC. This must be confirmed in writing by both parties, with the agreement setting out clear terms and conditions of how it will operate.

Needless to say, Poundland Ltd (TC8138) operated a bespoke retail scheme, referred to as the ‘old scheme’ in the case report, which was the subject of the appeal.

The old scheme operated from December 2002 until March 2017. From 28 March 2017, the retailer changed to a new retail scheme based on an EPOS (electronic point of sale) system, which the case report described as “very accurate and reliable.”

How the old scheme worked

The key aspects were that it:

  • identified the cost of zero-rated stock when it arrived at the stores for sale;
  • calculated the expected selling price of this stock, adjusting for stolen goods, discounts and returns;
  • deducted the expected selling price of zero-rated stock from total gross takings – the remaining balance is for standard rated sales, assuming there are no sales subject to 5% VAT;
  • no annual adjustments were needed.

The problem

HMRC’s concern was that Poundland did not adjust the figures for the closing stock of zero-rated items on their March 2017 return, the final return with the old scheme.

The HMRC officer concluded that zero-rated sales were therefore being double counted – once with the old scheme when they moved into the store; and once with the new scheme when they were sold after 27 March 2017. It raised an assessment for £2,150,777.

HMRC’s view

HMRC decided that the power to raise this assessment was given by the condition in the scheme agreement that an adjustment could be made if it was “fundamentally flawed” on any matter.

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Replies (12)

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Stepurhan
By stepurhan
24th Jun 2021 10:51

The classic HMRC tactic. Note the things to their benefit, ignore the things to the "customer's" benefit.

I agree that technology has moved on to a point retail schemes should no longer be needed. The answer should be a slow and sensible phasing out, not a cash grab by HMRC.

Thanks (3)
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By Paul Crowley
24th Jun 2021 11:41

Long time ago
But related, concerning self billing
The entry was equal and opposite. A bit like reverse charge on imports. Add to output and add to input.
HMRC on a visit to client ended up assessing some missing outputs but ignored the associated equal inputs.
I challenged and HMRC gave in but justified what happened by claiming the output was missed but up to client to make a claim for input at such time as he chose to do so

HMRC only ever look in a pay more tax direction. Will not see the other side unless made to do so.

Thanks (1)
RLI
By lionofludesch
25th Jun 2021 10:42

Time marches on. There were, at one time, twelve retail schemes which did not necessarily give the same answer and choosing one could be a very lucrative exercise. But, forty or fifty years ago, it was genuinely difficult for some retailers to separate at the point of sale and schemes were needed.

I'd phase them out if I were running the Government. Maybe keep a limited number of schemes for the very smallest businesses - but not for ever.

Folk like Poundland don't need retail schemes.

Thanks (0)
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By Beef curtains
25th Jun 2021 19:55

When are we to rid ourselves of this awful EU inspired tax. Since it was invented by a Frenchman you might expect to be a bit nutty but, given the huge administrative cost born by industry and commerce, let alone HMRC, it should be abolished, and I mean right between the eyes. I actually support indirect taxation so why not replace it with a straightforward, low rate, sales tax applicable to everything and charged based upon a business' turnover?

Thanks (1)
Replying to Beef curtains:
RLI
By lionofludesch
25th Jun 2021 20:11

Beef curtains wrote:

When are we to rid ourselves of this awful EU inspired tax. Since it was invented by a Frenchman you might expect to be a bit nutty but, given the huge administrative cost born by industry and commerce, let alone HMRC, it should be abolished, and I mean right between the eyes. I actually support indirect taxation so why not replace it with a straightforward, low rate, sales tax applicable to everything and charged based upon a business' turnover?

That's an easy one.

Never.

Thanks (1)
Replying to Beef curtains:
Maytuna
By DJKL
25th Jun 2021 22:22

The catch, as always, is margins, one persons low rate is another's high rate, so you then either have rates that are very favourable to some (those with high value added) and very unfavourable to others (those with low value added) or you add the complexity of differing rates by activity and get all the slippery stuff of some activities being "shoehorned" into the lower category by slight of hand , smoke and mirrors. (great for the accountants who dream up the mechanics and sell their ideas to the larger operators)

So, what is to be included, do we extend to financial trading, insurance etc, what about commercial property, residential rents etc etc.

IMHO there is no totally simple sales based tax, there are merely dreams there could be.

Thanks (0)
Replying to DJKL:
RLI
By lionofludesch
25th Jun 2021 23:20

No, you can't have a flat rate sales tax across the board. The profit on low margin stuff like petrol and baccer would be eliminated so you end up with dozens of rates for different categories of goods.

Then you nod sagely at Tony Barber's wise words - "VAT is a simple tax ....."

Thanks (0)
Replying to lionofludesch:
By Nick Graves
28th Jun 2021 12:04

lionofludesch wrote:

No, you can't have a flat rate sales tax across the board. The profit on low margin stuff like petrol and baccer would be eliminated so you end up with dozens of rates for different categories of goods.

Then you nod sagely at Tony Barber's wise words - "VAT is a simple tax ....."

Squirt & smokes are mostly tax anyway, with a bit of product thrown in.

All taxation is theft, but those products are pushing Gov't largesse to a whole new meaning.

Upshot is, a 20% sales tax would still be theft on top of theft, but without the merry-go-round behind it.

There'd undoubtably be a period of market adjustment and much gnashing of teeth, but it would eliminate a whole load of pointless complexity.

Thanks (0)
Replying to Nick Graves:
RLI
By lionofludesch
28th Jun 2021 12:29

Nick Graves wrote:

There'd undoubtably be a period of market adjustment and much gnashing of teeth, but it would eliminate a whole load of pointless complexity.

A simple tax is generally an unfair tax which disproportionately decreases taxes from folk most able to afford them and transfers the burden to the poor.

The same sales tax on food as on the rich bloke's Lambourghini ?

I don't think so.

Thanks (0)
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By Steve99
01st Jul 2021 06:58

Epos an accurate system, yeah as accurate as the people in putting the codes.
2 examples, a restaurant that had incorrectly zrated their srated sales got a ,£300000 assessment, the other a council that couldn't do a simple vat fraction and miss calculated vatable income received for 3 years (that's what you get when letting software programmers loose on your accounts softwear and don't check what they do). But the figures were believed cause the computer said so...

Thanks (0)
avatar
By Steve99
01st Jul 2021 06:58

Epos an accurate system, yeah as accurate as the people in putting the codes.
2 examples, a restaurant that had incorrectly zrated their srated sales got a ,£300000 assessment, the other a council that couldn't do a simple vat fraction and miss calculated vatable income received for 3 years (that's what you get when letting software programmers loose on your accounts softwear and don't check what they do). But the figures were believed cause the computer said so...

Thanks (0)
Replying to Steve99:
RLI
By lionofludesch
01st Jul 2021 08:05

There's a lot of truth in that. Morrison's have charged 20% VAT on reduced rate products. G T Smith's charged VAT on Jaffa Cakes. Chocolate Nesquik is the same price as strawberry and banana in Tesco.

Thanks (0)