When selling via Amazon FBA in the UK, you may occasionally receive reimbursements from Amazon for inventory that’s been lost or damaged.
A common question we get is:
“Do I need to account for VAT on these reimbursements?”
Let’s break it down.
DISCLAIMER
The team at Link My Books are happy to provide users with technical assistance in applying tax rules to their Link My Books setup. We are not Tax Advisors and so our advice and suggestions on the application of tax rules cannot be construed as tax advice. We highly recommend that users seek advice from qualified accountants for their tax compliance.
💡 Short Answer
It depends why Amazon reimbursed you:
Scenario | VAT Treatment |
Inventory lost/damaged before a customer buys it | No VAT due – it’s compensation for your loss |
Inventory lost/damaged after a customer buys it | VAT already handled by Amazon on the original sale |
📦 Pre-Order Lost or Damaged Inventory
Amazon may reimburse you for lost/damaged items that were:
Inbound to an Amazon warehouse
Sitting in FBA before being sold
In these cases, Amazon pays you your sourcing cost (i.e., what you paid to acquire the goods), and no customer was ever involved.
✅ VAT Position:
These payments are treated as compensation, not as a sale of goods. HMRC considers this outside the scope of VAT.
"A payment that is compensation for loss, and not consideration for a supply, is outside the scope of VAT."
So, no VAT is due on these reimbursements. You should still record them in your accounts, but without VAT.
🔁 Post-Order Lost or Damaged Inventory (e.g. Returns)
This happens when:
A customer returns an item but it’s damaged or lost
Amazon refunds the customer and reimburses you
In this case, the sale did occur, and VAT was already charged on the original order.
✅ VAT Position:
Amazon calculates your reimbursement based on the original order value minus fees and VAT. So, the VAT has already been handled.
No further VAT is due on your side.
🧾 How to Handle in Your Bookkeeping
Here’s a simple rule of thumb:
Type of Reimbursement | Suggested VAT Treatment in Xero/QB |
Pre-order (warehouse/inbound lost/damaged) | No VAT (Outside Scope) |
Post-order (customer return loss) | No VAT (already handled by Amazon) |
If you’re using Link My Books, these are our default tax rates too!
📚 Official References
Amazon FBA Lost & Damaged Inventory Policy:
Seller Central PolicyHMRC Guidance on Compensation Payments:
VAT Notice 700/7
✅ Summary
Pre-order FBA reimbursements? → No VAT.
Post-order reimbursements? → VAT already dealt with.
It’s one less thing to worry about – and we’re here to help make it even easier.
If you have any questions about this article or feedback on how we could make it better please reach out to the support team via the blue chat icon on the bottom right of the page or via email to [email protected].