Christmas returns: the VAT comes back in the new year

When a Christmas present goes back and you refund it, the VAT you declared on the sale comes back to you. But it comes back in the VAT period in which you pay the refund, not the one in which you made the sale. For a seller on calendar quarters, December's VAT is paid by 7 February, and January's refunds only reduce the bill due in May. Something has to fund the gap.

Short answers

The return. HMRC's VAT guide, section 18, puts the adjustment in the period "in which the increase in price or decrease in price occurs". For a refund, "this will be the accounting period where the refunded amount is paid to the customer".

The rate. The one that applied to the original sale.

A full refund. All the VAT on the sale comes off.

A partial refund, item kept. Say £15 back on a scuffed £60 item. The price has fallen by £15, so the VAT falls by £2.50.

A swap for the same item. HMRC lets the original VAT stand, with no VAT on a replacement given free of charge. Nothing to adjust.

A refund agreed but not yet paid. No adjustment until the money goes back. A returned parcel sitting in your stockroom does not reduce the VAT on its own.

A refund in the same quarter as the sale. Nothing to carry across: the return simply shows the lower sales figure.

A business customer. If you gave it a VAT invoice, the refund also needs a credit note that meets HMRC's rules, issued within 14 days of the refund.

The marketplace's fee. Where a marketplace hands back part of its fee on a refunded order, and you reclaimed VAT on that fee, the VAT on the part handed back comes off what you reclaim.

A January in Wood Green

Illustration, not a real client. Ola sells headphones and gadgets online from Wood Green and is VAT registered on calendar quarters. December brings £120,000 of sales including VAT, so £20,000 of VAT goes on his October to December return, paid by 7 February.

In January he refunds £12,000 of December orders in full, which takes £2,000 off his VAT, and makes 60 partial refunds of £10 for damaged boxes, which takes off £100 more. The £2,100 goes on his January to March return, due by 7 May. The £12,600 of refunds leaves his account in January; the £2,100 of VAT comes back in May, as a smaller bill. Had he paid those refunds on 30 December, the adjustment would have gone on the October to December return, in the same quarter as the sales.

The tempting shortcut is to knock January's refunds off December's sales on the earlier return. It puts the adjustment in the wrong period, and even though the total across the two returns comes out the same, the first return is wrong and has to be corrected.

Set up for January

Export refunds by the date the money went back, not the date of the order, and keep full refunds, partial refunds and like-for-like swaps apart. Keep each platform's refund report with the return it supports, and check each marketplace's fee credits against its refunds.

Then keep cash back in January for refunds of December sales: on Ola's figures, £2,100 of VAT already paid that he will not see again until May. Our guide to how a Shopify refund unwinds the sale and the VAT walks through the entries, and the same steps for refunds and returns on eBay are set out separately.

Run the refund export on 1 February, once January's refunds are in, and you will know how much cash the gap needs before the 7 February payment.

About the author

Harvey Dhillon is Founder and CEO of Zmartly, a UK accountancy firm for ecommerce sellers. He grew up in West London and began his career in investment banking finance at Barclays, before going full-time on Zmartly in 2020. He is a Chartered Management Accountant (ACMA, CGMA).

Featured photo by Anastasiya Doicheva on Unsplash.