UK Pharmacies are our priority customers

Retail Chemists’ VAT Adjustment Scheme Calculation for Pharmacies

Pharmacy owners get an end-to-end setup and annual adjustment under the Retail Chemists’ VAT Adjustment Scheme, so daily takings, VAT reclaims and final returns are correct and defensible.

• 30+ years of experience
• Specialised Pharmacy VAT Expert in UK

What does our service include for retail chemists’ VAT adjustments?

You get a pharmacy-specific programme led by a VAT Accountant and VAT consultant that sets up your scheme, runs period calculations and completes the annual adjustment with partial exemption alignment.

• Scheme selection and onboarding
  We assess Apportionment Scheme 1, Direct Calculation 1 or 2, or Point of Sale, then select the most accurate and practical option for your branch setup and EPOS capability.
  
• EPOS and records configuration
  We align product categories to VAT behaviour at 20 percent, 5 percent and zero rate, and capture exempt services. We ensure daily gross takings are recorded consistently and traceably.
  
• Monthly and quarterly calculations
  We compute your scheme ratios, apply VAT fractions to DGT, reconcile to Z reads and OTC sales reports, and post journals with pharmacy-ready Xero VAT codes.
  
• Annual adjustment and sign-off
  We perform the statutory annual adjustment using full-year purchases and sales, prepare the working papers, and post the year-end correcting entry to the VAT return.
  
• Partial exemption integration
  We run the partial exemption calculation and annual true-up alongside the retail adjustment to prevent double counting and to maximise recoverable input VAT.
  
• HMRC defence and training
  We issue a signed methodology pack, train your team, and handle HMRC queries on scheme choice, ratios, evidence and adjustments.
  

Which scheme should a pharmacy use in practice?

The best scheme balances accuracy, workload and control. If your EPOS can tag VAT at item level, the Point of Sale scheme is most accurate. If not, choose between Apportionment or Direct Calculation based on data quality and product mix.

• Apportionment Scheme 1
  Suits smaller businesses up to roughly £1 million turnover where the purchase mix reflects the sales mix. You use the ratio of standard, reduced and zero-rated purchases to apportion DGT. You must complete an annual adjustment.
  
• Direct Calculation Schemes 1 and 2
  Use Expected Selling Price for either the minority or majority of goods to derive the proportion of standard, reduced and zero-rated sales. This helps where purchase mix does not mirror sales mix. You must complete an annual adjustment.
  
• Point of Sale Scheme
  Uses EPOS to record VAT rates at the till for each sale. Most accurate and preferred where tills and staff discipline support correct mapping.
  

We test all three using your last twelve months of data, then confirm the most suitable scheme with a written recommendation from a VAT Expert.

How do daily gross takings feed the VAT calculation?

DGT is the core input for retail schemes. Accuracy at source drives correct VAT outputs and lowers the annual true-up.

• Capture Z reads or EPOS DGT by day with voids, refunds and discounts recorded.
  
• Reconcile DGT totals to bankings after card fees and cash differences.
  
• Tie DGT to purchase cycles and seasonal promotions to explain ratio movements.

How is the annual adjustment calculated and posted?

The annual adjustment corrects the in-year estimates to actuals using the full year’s purchases and sales.

• Step 1: Compile annual purchases grouped by VAT rate.
  
• Step 2: Derive annual proportions of standard, reduced and zero-rated mixes.
  
• Step 3: Apply proportions to annual DGT to create an accurate sales breakdown.
  
• Step 4: Calculate final VAT using VAT fractions such as 1/6 for 20 percent and 1/21 for 5 percent.
  
• Step 5: Compare to VAT already declared during the year, and post the difference on the final VAT return.
  
• Step 6: Document the method and retain evidence for HMRC.
  

We post a single year-end journal, cross-reference to your VAT return, and include the computation in your year file.

How does partial exemption interact with the retail scheme?

Partial exemption controls recovery of residual input VAT on overheads where you have both taxable and exempt supplies.

• We classify income into taxable at 20 percent, 5 percent and zero rate versus exempt services.
  
• We calculate monthly recoverable percentages and run an annual true-up.
  
• We ensure the retail scheme output and partial exemption do not double count or omit taxable proportions.
  
• We apply de minimis tests and record the basis chosen, then retain the workbook.
  

This integration raises recoverable VAT where zero-rated taxable sales are strong and prevents losses from miscoding exempt sales.

What documents and data points do we need to start and run the scheme?

Good inputs speed implementation and reduce rework.

• EPOS product master with VAT categories, PLUs and barcodes.
  
• Three to twelve months of DGT or Z reads with refunds and discounts.
  
• Purchase reports by VAT rate and by supplier, including medicines, devices and retail sundries.
  
• Evidence for ESP calculations where Direct Calculation is selected.
  
• Copies of supplier rebate statements, commission notes and credit notes.
  
• Current Xero chart of accounts and VAT codes.
  
• Any existing partial exemption or RX marginal worksheets.

How do we configure EPOS and bookkeeping to support the scheme?

Configuration ensures item categorisation and journals match the agreed method.

• EPOS
  Map categories to VAT rates at 20 percent, 5 percent and zero, and flag exempt services. Lock down manual overrides to supervisor level. Add rules for promotions, bundles and multi-buys that preserve VAT logic.
  
• Xero
  Create sales VAT codes for 20 percent, 5 percent, zero and exempt, purchase codes for the same and import VAT via PIVA. Build tracking for branches and service lines to support annual adjustments.
  
• Month-end pack
  Include DGT summaries, EPOS variance checks, purchase VAT summaries, and a short retail scheme worksheet with scheme ratio, VAT fractions and journals.

What common errors do we remove that cost pharmacies money?

We target mistakes that distort VAT and increase HMRC risk.

• Using purchase ratios that do not reflect sales mix without testing Direct Calculation.
  
• Treating reduced-rate or zero-rated items as 20 percent at the till.
  
• Missing the annual adjustment or using the wrong VAT fraction.
  
• Double counting with partial exemption or RX marginal workings.
  
• Posting rebates and commission credits as negative purchases without reverse VAT logic.
  
• Lack of evidence for ESP assumptions in Direct Calculation.

How do we keep the scheme accurate during the year?

Maintenance keeps calculations aligned with reality as product mix and promotions change.

• Quarterly scheme ratio reviews and sample receipt testing.
  
• Supplier anomaly checks for inconsistent VAT on identical lines.
  
• Updates to EPOS mappings and the VAT rate register with version control.
  
• Staff refreshers and a one-page quick guide by the till.

What happens next?

Send your latest DGT report, a purchase VAT summary and an EPOS product export. We will test Apportionment, Direct Calculation and Point of Sale on your data, show the variance in VAT payable or reclaimable, and implement the best-fit scheme with an annual adjustment plan.

RX Virtual Finance LTD is your pharmacy-specialist VAT Accountant, VAT consultant and VAT Expert for the Retail Chemists’ VAT Adjustment Scheme, delivering accurate DGT-based VAT, clean annual adjustments and HMRC-ready documentation.