Year-end stock for online sellers: count it on 31 December

For an online seller whose year ends on 31 December, the stock still unsold that night moves the year's profit pound for pound. Count too much, or value it too high, and you pay tax on profit you have not made. The basis HMRC accepts for a retailer is the lower of what the stock cost and what it will now fetch, and after Christmas those two figures can be a long way apart. The count is just over nine weeks away, which is time enough to set it up properly.

Who has to count

A limited company always has to put a figure on its closing stock. Sole traders are different. The cash basis, which became the default from 6 April 2024, records income and costs when money changes hands. So the count matters most to companies, and to sole traders who chose traditional accounting, which gov.uk suggests for a business with "high levels of stock".

Count what you own, wherever it sits

Stock in an Amazon fulfilment centre is still yours, so it is still in the count. You cannot walk the aisles, so the figure comes from Amazon's inventory report for 31 December itself, checked against your own record of what you sent in and what sold. Our guide to reconciling Amazon's inventory report to your own records takes the report line by line.

Then add what is at home, in a third-party warehouse or on its way from the supplier, if it was yours on 31 December. Leave out units Amazon has lost or damaged and is reimbursing. That is money owed to you, not stock you can sell.

Value it at the lower of cost and what it will fetch

HMRC's Business Income Manual accepts the lower of cost and net realisable value as a basis for valuing stock. Cost means everything it took to get the goods to where they are and the state they are in, so freight and import duty sit alongside the supplier's price. Net realisable value is the price you expect to sell at in your normal market, less the further costs of selling, which for a marketplace seller means the fees and any other cost of getting it to the customer.

You compare the two product by product and take the lower. HMRC adds two limits. The value is set on normal commercial terms, not a forced sale on the night. And the manual rejects "last in, first out" as a way of costing what is left.

What a Christmas leftover does to the numbers

Illustration, not a real client. Omar's company sells phone accessories through Amazon and its own website from Wembley, with a year end of 31 December. That night it holds stock that cost £24,000, freight and duty included. Almost all of it sells comfortably above cost.

One line does not: 600 novelty phone cases that cost £6 each landed. In January they will sell for £8, and the fees on each sale come to £4.50, so each case will bring in £3.50.

• At cost: 600 at £6 is £3,600.

• At net realisable value: 600 at £3.50 is £2,100.

• The write-down: £1,500, which comes off this year's profit. For a company paying the 19 per cent small profits rate of Corporation Tax, already set for a year ending 31 December 2026, that is £285 less tax for the year.

The opposite mistake is just as easy. Count 300 chargers that cost £6 each and that Amazon has already lost, and the stock figure, and the profit, are £1,800 too high.

Before 31 December

1. Put the inventory report download in the diary for 31 December itself, and keep the dated file.

2. Reconcile Amazon's closing units to your own: opening stock, plus units sent in and returns put back on sale, less units sold, removed or written off.

3. Work out each product's landed cost: the supplier's price plus freight and duty.

4. List the slow lines, and price each at what it will really sell for in January, less fees.

5. Keep the workings. If HMRC asks how you reached the figure, the answer is the file.

Christmas decides what you sell. The count on 31 December decides what you pay tax on.

About the author

Harvey Dhillon is the 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 CHUTTERSNAP on Unsplash.