Jones is a clothes retailer and has two shops in the local High Street. The first shop sells women's clothes; the second shop sells a mixture of women's and girls' clothing.
On 15 July, the gross takings from the first shop were £2,400; the sales of the second shop were £3,250.
What is the position of the two shops as far as output tax is concerned?
Solution – there is no problem with the output tax position of the first shop because all goods are being sold at one rate of tax, ie standard rated for adult clothing. The output tax liability at a 20% rate will be: £2,500 × 1/6 = £400.
Note – 1/6 is the fraction relevant to a VAT rate of 20%.
However, there is a problem for the second shop because some of the sales are standard rated (adult clothing) and some sales are zero-rated (children's clothing). A special method of calculation is needed to establish how much of the £3,250 is zero-rated and how much is standard rated – this objective will be achieved by the business adopting one of the five