V3.573 Direct calculation schemes

V3.573 Direct calculation schemes

The direct calculation schemes (ESP1 and ESP2) are used to calculate output tax on supplies of goods and services at more than one rate of tax. The schemes are described in Notice 727/5/201 (Part V8).

The ESP schemes work by calculating the expected selling prices of goods purchased for resale. The schemes only require that the expected selling prices of so-called “minority goods” are calculated. These are goods at the rate of tax which form the smallest proportion of all retail supplies made. However, in the case of ESP1 only, it is possible to calculate the expected selling prices of majority goods where this is easier2. It is important that expected selling prices are calculated accurately, otherwise the scheme calculation will be incorrect3.

HMRC allow various methods of calculating expected selling prices4. A retailer will normally be expected to mark up each line of goods, since this is the most accurate method. However he may5

  1.  

    (a)     mark up classes of goods (eg vegetables or confectionery), if—

  2.  
    1.  

      (i)     he is unable to mark up each line;

    2.  

      (ii)     the variation in mark up within the group is no more than 10 per cent;

    3.  

      (iii)     the mark up is reviewed each quarter; and

    4.  

      (iv)     the class of goods has a commercial basis and is not constructed artificially;

  3.  

    (b)     use recommended retail prices, if—

  4.  
    1.  

      (i)     he is able to record the RRP on receipt of the goods, and

    2.  

      (ii)     his invoices or other supplier documentation show the tax

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