Record each refund as its own transaction linked to the original sale, not as a general expense. A refund reverses the sale and, if you are VAT-registered, the VAT you charged, and a returned item that goes back on the shelf also has to go back into your stock figure.
A refund is not an expense. It reduces your sales. If it is booked as a cost, turnover is overstated, which can distort your VAT threshold test and your VAT return. If it is left buried inside a payout, you cannot see your true refund rate.
If you are VAT-registered, you can reduce your output VAT when you refund a customer, but you need to keep a credit note (or equivalent record) showing the original sale and the refund. A partial refund reduces VAT in proportion. Marketplaces such as Amazon and Etsy generate their own refund records, so download them rather than relying on your bank statement.
If you refund after the VAT return has been filed, you adjust in the return for the period in which the credit note is issued, without having to amend the earlier return, provided the correction is within HMRC's limits.
See our guides to multi-channel bookkeeping and stock accounting.
Sources: GOV.UK: VAT credit notes and debit notes, GOV.UK: correct VAT errors and make adjustments.
We reconcile refunds and returns as matched transactions, so turnover, VAT and stock all stay accurate.
Talk to an AccountantRecord each refund as its own transaction linked to the original sale, not as a general expense. A refund reverses the sale and, if you are VAT-registered, the VAT you charged, and a returned item that goes back on the shelf also has to go back into your stock figure.
If you are VAT-registered, you can reduce the output VAT on your return when you refund, provided you keep a credit note or equivalent record showing the original sale and the amount refunded.
No. A refund reduces your sales. Booking it as an expense overstates turnover, which affects your VAT threshold test, your VAT return and any profit-based figures.
Put it back into stock at its original cost so that cost of goods sold is not overstated. If the item is damaged or cannot be resold, record it as a stock write-off instead.