Written for owners of independent shops and small chains in the UK: convenience and grocery, newsagents and off licences, fashion, gifts, hardware, and garden and farm shops.
The short version
- Take the VAT out before you work margin.Margin is profit divided by the price net of VAT. Any VAT inside a shelf price was never yours.
- Price new lines from your target margin.Divide cost by one minus your target margin to get the net price. Add VAT on standard-rated lines; zero-rated ones sell at that price.
- Plan markdowns before you place the order.Build them into your open-to-buy, the budget for stock you can still order. Markdowns are margin you give away.
Markup and margin are easy to mix up, and margin is easy to work out on the wrong price. Your shelf price includes VAT on standard-rated lines. That VAT is not yours, so it has no place in your margin. Work margin on the shelf price and every report you read flatters you.
Margin and markup are different numbers
- Margin is profit as a share of the price net of VAT: (net price minus cost) divided by net price.
- Markup is profit as a share of cost: (net price minus cost) divided by cost.
- For example, a line on the shelf at £3.60, standard-rated at 20%, is £3.00 net. On a £2.00 cost that is a 33.3% margin and a 50% markup.
- To price from a target margin, the net price is cost divided by (1 minus the margin). Multiply by 1.2 for the shelf price of a standard-rated line. A zero-rated line goes on the shelf at the net price.
- State on every margin report the VAT basis, the period, and whether stock is at cost or at retail.
| Cost | £2 |
| Margin, 35% of the net price | £1.08 |
| Net price | £3.08 |
| Shelf price for a standard-rated line | £3.69 |
£2.00 / 0.65 = £3.0769 net, x 1.2 = £3.6923, rounded to £3.69A zero-rated line at the same margin goes on the shelf at £3.08.
A margin worked on the VAT-inclusive price counts the VAT as your profit, and every buying and pricing decision built on it inherits the error.
Markdowns are margin you give away
Plan markdown in your open-to-buy, not after the event. Here is what an unplanned clearance does to a season of coats bought at £40 each, for example.
| 120 coats at full price: £120 ticket, £100 net | £12,000 |
| 80 coats at 40% off: £72 ticket, £60 net | £4,800 |
| Net sales | £16,800 |
| Margin achieved | £8,800 |
£16,800 minus £8,000 cost (200 coats at £40) = £8,800, which is 52.4% against the planned 60%The markdown cost £3,200: 80 coats, each sold for £40 net below full price.
Open-to-buy: how much you can still order
Open-to-buy for a month is planned sales at cost, plus planned closing stock at cost, minus opening stock at cost, minus stock already on order. Work it out before you commit to a forward order.
| Planned sales at cost (£60,000 net at a 55% margin) | £27,000 |
| Planned closing stock at cost | £30,000 |
| Less opening stock at cost | -£38,000 |
| Less stock already on order | -£9,000 |
| Open-to-buy at cost | £10,000 |
Was prices and card fees
A 'was' price must be genuine
Reference prices must be genuine. A price charged only briefly may mislead, depending on its context, its prominence and how representative it was. Trading Standards (CTSI) pricing practices guidance informs how that is judged, but it is not a legal minimum number of days. As of Oct 2026.
DMCC Act 2024 s.226
That 'was' price is misleading: it was charged briefly and nothing sold at it. The CMA can now fine a business directly.
No card fee on consumer payments
You cannot add a surcharge to a consumer's credit or debit card payment, in store or online, and a customer who paid one can recover it. A cash discount off the displayed card price is lawful, but a lower 'cash price' shown only at the till risks a misleading omission. As of Oct 2026.
Consumer Rights (Payment Surcharges) Regulations 2012 regs 6A and 10; DMCC Act 2024 s.227
Shelf labels and promotions: what changed
Unit prices and loyalty prices
Shelf prices must include VAT. From 6 April 2026, goods covered by the rules must show the prescribed unit price, generally per item, kilogram, litre or metre as appropriate, and each loyalty price normally needs its own unit price. A shop of 280 square metres or less is still exempt for prescribed bread and prepacked constant-quantity products, but not for goods sold loose. As of Oct 2026.
Price Marking Order 2004, as amended from 6 April 2026
Less healthy food: businesses with 50 or more employees
If your business has 50 or more employees in all, less healthy food cannot go at entrances, checkouts or aisle ends in England (stores under 2,000 square feet are exempt from the placement rule only), and since 1 October 2025 it cannot be sold on volume promotions such as 3 for 2. For example, 4 convenience stores with 52 employees in all cannot run '3 for £2' on crisps that count as less healthy under the nutrient profiling model, but a single-item price cut is lawful. Wales's own regulations came into force on 26 March 2026 and Scotland's on 1 October 2026; Northern Ireland has none. As of Oct 2026.
Food (Promotion and Placement) (England) Regulations 2021; Food (Promotion and Presentation) (Wales) Regulations 2025; Food (Promotion and Placement) (Scotland) Regulations 2025
Count stock at least twice a year, and monthly on spirits, tobacco, vapes, razors and baby milk.
Asked in Greymill
Shelf price: £3.69
Without VAT at 20% (As of Oct 2026): £3.69 / 1.2 = about £3.08
Profit: £3.08 minus £2.00 = £1.08
Margin: £1.08 / £3.08 = about 35%
Your 46% was worked on the shelf price, so it counted the VAT as profit. That VAT was never yours.
Say you cut to £3.00: that's £2.50 without VAT, so a 20% margin. On the shelf price it would still look like about 33%.
For Christmas: build any offer into your open-to-buy (the budget for stock you can still order) now, not after the event. Markdowns are margin you give away.
Send me your top 20 lines and I'll check the true margin on each.
Ask it about your own business
Paste this into Greymill with your own figures, and Cash & Profit works it through for your business.
I run a shop in the UK. Here are my top [20] lines with cost price, shelf price and VAT rate: [paste]. Work out the true margin on each, net of VAT, flag any below [target]%, and suggest a shelf price for each that hits [target]%.
More for shops and physical retail in the UK
- Paying for Christmas stock before Christmas pays youWhy a shop's cash can run out in January, straight after its best month, and how a 13-week forecast shows it in time to act.Read the lesson
- Am I charging the right VAT, and paying the right business rates?Which of a shop's lines carry VAT, how to code the till and pick a retail scheme, what to do about a past mistake, and how a shop's rates bill is worked out.Read the lesson
- Selling alcohol, tobacco and vapes without putting the licence at riskThe ages, the defence that protects you, the fireworks sale windows, keeping the licence live, what to do after a failed test purchase, and the tobacco and vape changes landing between October 2026 and March 2027.Read the lesson
- Signing or renewing a shop lease without walking into a trapSecurity of tenure, notice deadlines, break clauses, service charges and personal guarantees: the lease terms that decide whether a shop can stay and what it really pays.Read the lesson
- Sundays, under-18s on the till and customers who cross the lineThe shop-floor staff rules: Sunday opt-outs, young workers selling alcohol, harassment by customers, and what staff should do about shoplifters.Read the lesson
- A customer is back with something faulty and wants a refundWhat the law says you owe on day 25, day 70 and in month 5, why a 'no refunds' sign can get you into trouble, and what a gift voucher must say about expiry.Read the lesson
Open the interactive lesson · Every shops and physical retail lesson · What Greymill knows about the trade
Sources
The primary sources behind this lesson, checked Oct 2026.
- VATA 1994 s.2(1) (Show the MATHS: margin, stock turn and shrink)
- ss.225 to 230; Sch 20 (Pricing law: DMCC act, price marking and promotions)
- Part 3 Chapter 4 (CMA direct enforcement penalties) (Pricing law: DMCC act, price marking and promotions)
- s.230 (material information in an invitation to purchase) (Pricing law: DMCC act, price marking and promotions)
- CMA208 (Pricing law: DMCC act, price marking and promotions)
- PMO 2004 arts 4, 5, 6 and Sch 1; DBT guidance (Pricing law: DMCC act, price marking and promotions)
- Food (Promotion and Placement) (England) Regulations 2021 regs 3 to 6 (as amended) (Pricing law: DMCC act, price marking and promotions)
- regs 4, 6A, 10 (Payments, surcharges and gift VOUCHERS)
- DMCC Act s.227 (Payments, surcharges and gift VOUCHERS)
- FCA DISP 2.7.3R (small business definition) (Payments, surcharges and gift VOUCHERS)