Your Amazon payout never matches your sales. Amazon takes its fees, holds back reserves, deducts refunds, and then drops a single net figure into your bank. If you code that lump sum straight to "Sales", your VAT return is wrong and your numbers are meaningless.
The fix is an Amazon clearing account (also called a settlement account or settlement control account) in Xero. You post the gross detail of each settlement into it, and the bank payout clears it back down. When it lands at zero, you know you've captured everything.
This guide shows you how to set up that account, build a chart of accounts that survives a VAT inspection, post a settlement journal step by step, and keep the whole thing MTD-compliant. It's written for UK Amazon FBA and FBM sellers who use Xero. If you sell on Amazon, our accounting service for Amazon FBA sellers is built around exactly this workflow.
What is an Amazon settlement account in Xero?
An Amazon settlement (or clearing) account is a holding account in Xero where you post the gross detail of a settlement, so that when the net Amazon payout hits your bank, it clears the account back to zero and proves nothing was missed.
It's a control account, not a real bank account. Think of it as a temporary parking space. Gross sales, refunds, and every Amazon fee go in. The actual cash payout takes them out. If the balance doesn't return to zero (or to an explainable "in transit" figure for a settlement that straddles your period end), something hasn't been booked correctly.
Why can't I just code the Amazon payout to sales?
Because the payout is a net figure, and HMRC taxes you on your gross sales, not what Amazon chooses to send you.
A single fortnightly settlement bundles together:
- Gross sales income
- Refunds and returns
- Referral (commission) fees
- FBA fulfilment and storage fees
- Advertising costs
- Reimbursements
- Withheld reserves
If you book only the net deposit as turnover, you understate sales, you lose the input VAT on Amazon's fees, and your VAT return Box 6 (the net value of your sales) is understated. HMRC's guidance is clear that your VAT account must be a complete audit trail between your records and your return, so the gross detail has to be captured.
In practice, the most common Amazon bookkeeping failure we see isn't a misunderstanding of tax. It's coding the payout straight to sales and never reconciling the difference. The clearing account exists to make that mistake impossible.
What chart of accounts do I need first?
Before you touch a settlement, set up accounts in Xero that separate the material categories. Here's a sensible starting layout.
| Account | Type | Purpose |
|---|---|---|
| Amazon Settlement Clearing | Current asset (or current liability) | Holds gross activity; clears to zero on payout |
| Amazon Sales | Revenue | Gross product sales (standard-rated) |
| Amazon Refunds | Revenue (contra) | Refunds and returns, reducing sales |
| Amazon Referral Fees | Expense | Commission Amazon charges per sale |
| Amazon FBA Fees | Expense | Fulfilment and storage fees |
| Amazon Advertising | Expense | Sponsored Products and other ad spend |
| Amazon Reimbursements | Revenue or other income | Lost or damaged stock reimbursements |
Set the clearing account up as a bank account or an account you can reconcile against, so the payout can be matched to it. Once this skeleton exists, every settlement maps onto the same accounts every time, which is what keeps the numbers comparable month to month.
How do I set up the Amazon clearing account in Xero?
Follow these steps once, then reuse the structure for every settlement.
- Go to Accounting > Chart of accounts > Add account.
- Choose an account type you can reconcile. Many sellers use a Bank type so the Amazon payout can be matched to it on the bank reconciliation screen. A Current Asset account also works if you prefer to clear it by manual journal.
- Name it clearly, for example "Amazon Settlement Clearing", and give it a code that sits near your bank accounts in the chart.
- Add the revenue and expense accounts from the table above if they don't already exist, each with the correct default VAT rate (more on VAT below).
- Decide your posting method: a manual settlement journal, or an integration that auto-generates the journal. Either way, the destination is the same clearing account.
That's the whole setup. The work that follows is repeatable: pull each settlement, post the gross detail, then reconcile the payout.
How do I handle VAT on Amazon settlements?
This is where most sellers go wrong, so take it in three parts: your sales VAT, the VAT on Amazon's fees, and who is liable when stock or sellers sit overseas.
What VAT do I charge on my sales?
If you're UK VAT-registered and selling standard-rated goods to UK customers, you charge VAT at the standard rate of 20% for the current period (gov.uk VAT rates). You must register for VAT once your taxable turnover exceeds the registration threshold of £90,000, current from 1 April 2024 (gov.uk VAT registration thresholds).
Crucially, your VAT is calculated on gross sales, not the net payout. That's exactly why the clearing account matters: it preserves the full sales figure for Box 1 and Box 6 of your return.
How do I treat VAT on Amazon's fees?
Since 1 August 2024, Amazon charges UK VAT directly on its seller fees. Amazon's UK selling-on-Amazon services are now provided to UK-established sellers by Amazon's UK entity, so its referral, FBA and advertising fees carry 20% UK VAT on the invoice. This replaced the old position, where the fees were billed by an overseas Amazon entity and you self-accounted under the reverse charge. That reverse-charge treatment is now obsolete for UK sellers and should not be applied.
In practice this means you treat Amazon's fee invoices like any other standard-rated UK purchase: the 20% VAT Amazon charges is input tax you reclaim in Box 4 (subject to your normal recovery position), and the net fee value goes in Box 7 (gov.uk VAT Notice 700/12). In Xero, apply the standard 20% VAT on Expenses rate to those fee lines rather than a reverse-charge rate. Always check your current fee invoices: they should now show UK VAT and Amazon's UK VAT number, which confirms the direct-charge treatment applies.
Who accounts for the sale VAT when goods or sellers are overseas?
If you're a UK-established seller holding your own stock in the UK, this part doesn't change your treatment. But it's worth understanding the marketplace rules, because they affect what Amazon shows on your settlement.
- For consignments of goods valued at £135 or less that are located outside the UK at the point of sale and sold to UK customers through the marketplace, Amazon is liable for the supply VAT, not the seller (gov.uk: VAT on overseas goods sold using online marketplaces).
- For goods of any value that are already located in the UK at the point of sale and sold by an overseas (non-UK established) seller, Amazon is also liable for the VAT. The overseas seller is treated as making a zero-rated "deemed supply" to Amazon.
- For consignments over £135 sent from outside the UK, normal import VAT and customs rules apply on importation rather than VAT at the point of sale (gov.uk: VAT on overseas goods sold directly to UK customers).
The practical point: if Amazon has collected and remitted VAT on some of your orders under these rules, that VAT must not be double-counted in your own return. Your settlement will distinguish "marketplace facilitator" tax from your own, and your clearing journal should keep the two apart.
How do I post a settlement journal in Xero? (worked example)
Here's the core skill. The aim is a journal that posts the gross detail to the clearing account, so the bank payout reconciles against it cleanly.
Illustrative example. Priya runs a UK VAT-registered FBA business and downloads her latest 14-day settlement report. After breaking it down, the figures are:
| Settlement line | Amount | VAT treatment |
|---|---|---|
| Gross sales (standard-rated, UK) | £10,000.00 | 20% VAT included |
| Refunds | (£600.00) | 20% VAT included |
| Referral fees | (£1,500.00) | 20% UK VAT charged by Amazon |
| FBA fulfilment and storage fees | (£900.00) | 20% UK VAT charged by Amazon |
| Advertising | (£400.00) | 20% UK VAT charged by Amazon |
| Net Amazon payout to bank | £6,600.00 |
The arithmetic: 10,000 − 600 − 1,500 − 900 − 400 = £6,600. That's the cash Amazon will deposit.
Of the £10,000 gross sales, the VAT element is £10,000 / 6 = £1,666.67, leaving net sales of £8,333.33. Of the £600 refunds, the VAT element is £100.00, leaving net refunds of £500.00.
Amazon's fees now arrive with 20% UK VAT already on them, so the amounts deducted from your payout are VAT-inclusive. Strip the VAT out of each fee and post it as input tax (Box 4). The £1,500 referral fee is net £1,250.00 plus £250.00 VAT; the £900 FBA fee is net £750.00 plus £150.00 VAT; the £400 advertising fee is net £333.33 plus £66.67 VAT. That's £2,333.33 net fees and £466.67 of reclaimable input VAT, totalling the £2,800.00 gross deducted from the payout.
You post a manual journal that records the gross detail against the clearing account:
| Account | Debit | Credit | VAT |
|---|---|---|---|
| Amazon Settlement Clearing | £10,000.00 | No VAT | |
| Amazon Sales (net) | £8,333.33 | 20% (output £1,666.67) | |
| Amazon Refunds (net) | £500.00 | 20% (output −£100.00) | |
| Amazon Settlement Clearing | £600.00 | No VAT | |
| Amazon Referral Fees (net) | £1,250.00 | 20% (input £250.00) | |
| Amazon FBA Fees (net) | £750.00 | 20% (input £150.00) | |
| Amazon Advertising (net) | £333.33 | 20% (input £66.67) | |
| Amazon Settlement Clearing | £2,800.00 | No VAT |
Walk the clearing account: it's debited £10,000 (sales in), then credited £600 (refunds out) and £2,800 (gross fees out), leaving a £6,600 debit balance. When the £6,600 Amazon payout lands in your bank, you match it against the clearing account and the balance returns to £0. That zero is your proof the settlement is complete. Note that the £2,800 credited to clearing is the VAT-inclusive fee total: the net fees (£2,333.33) hit your expense accounts and the £466.67 input VAT goes to Box 4.
If you prefer not to journal by hand every fortnight, an automated settlement-to-Xero integration can generate the same journal for you. The accounting logic is identical, so the integration is a time-saver, not a substitute for understanding the entries.
How often should the clearing account reconcile to zero?
Ideally after every settlement, and certainly by month-end. A clearing account that sits at zero (or at a clearly explainable in-transit balance for a settlement that crosses your period end) is one of the strongest signals your Amazon numbers are complete.
If it won't clear, the usual culprits are a missing reserve adjustment, a fee category you forgot to map, or a payout that hasn't reached the bank yet. Chase the difference; don't write it off.
Does this need to be MTD-compliant?
Yes. Making Tax Digital for VAT is mandatory for all VAT-registered businesses, and records must be kept digitally with returns filed through compatible software (gov.uk: Making Tax Digital for VAT). Xero is MTD-compatible, and a clean settlement journal feeds your VAT return directly.
You must also keep your VAT records, including the VAT account that links your records to your return, for at least 6 years (gov.uk: keeping VAT records). Keep your downloaded settlement reports alongside the journals so the audit trail is intact.
FAQs
Should the Amazon clearing account be an asset or a liability in Xero?
Either works. While Amazon owes you a pending payout, the clearing account naturally sits as a current asset (a debit balance). Many sellers set it up as a Bank-type account purely so the payout can be matched on the bank reconciliation screen. The label matters less than the discipline of clearing it to zero.
Do I pay VAT on the net payout or my gross sales?
Your gross sales. The payout is net of Amazon's deductions, but UK VAT is due on the full value of the goods you sell. That's the entire reason for posting gross detail through a clearing account rather than coding the deposit to sales.
How is VAT on Amazon's referral and FBA fees handled?
Since 1 August 2024, Amazon charges 20% UK VAT directly on its referral, FBA and advertising fees to UK sellers, so you treat them like any other standard-rated UK purchase: reclaim the VAT as input tax in Box 4 and put the net fee in Box 7. The old reverse-charge treatment no longer applies. In Xero, apply the standard 20% VAT on Expenses rate to those fee lines, and check your invoices show UK VAT and Amazon's UK VAT number.
What if Amazon has already collected VAT on some of my sales?
Under the online marketplace rules, Amazon is liable for the VAT on certain overseas-related sales (for example consignments of £135 or less from outside the UK, or any-value goods in the UK sold by a non-UK seller). Where Amazon has accounted for that VAT, you must not include it again in your own return. Keep marketplace-facilitated tax separate in your clearing journal.
Why won't my clearing account reconcile to zero?
The usual reasons are an unmapped fee type, a missed reserve or reimbursement, or a payout still in transit at period end. An in-transit balance is fine if you can explain it. Anything else means a line from the settlement hasn't been posted; find it before you file.
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Get your Amazon books reconciling cleanly
If your Amazon settlements never quite tie back to your bank, or you're unsure you're reclaiming the VAT on Amazon's fees correctly, we can fix the setup once and keep it clean. See how our Amazon FBA accountants handle settlement bookkeeping in Xero, or book a call with a Zmartly accountant.
