If Amazon has paid you for stock it lost or damaged in a fulfilment centre, you might be wondering where that money sits at year end. Is it a sale? Is there VAT on it? Does it just disappear into your Amazon payout and sort itself out?
It does not sort itself out. FBA reimbursements have a specific tax shape, and getting it wrong is one of the more common mistakes we see on Amazon seller accounts.
This guide explains how to treat FBA reimbursements for both VAT and income tax in the UK for 2025/26, with the gov.uk rules behind each point. It is written for UK-based Amazon sellers, whether you trade as a sole trader or through a limited company.
Are Amazon FBA reimbursements taxable? Short answer
Yes. An FBA reimbursement for lost or damaged stock is normally taxable as trading income, because it fills a hole in your trading profits. It is usually outside the scope of VAT, though, because it is compensation for a loss rather than payment for a supply you have made to Amazon.
So you count it in your taxable profit, but you do not normally charge or account for VAT on it. The rest of this guide explains why, and the few situations where that changes.
What is an FBA reimbursement?
When you use Fulfilment by Amazon, your stock sits in Amazon's warehouses and Amazon handles storage, picking, packing and delivery. Sometimes things go wrong on Amazon's side.
Amazon's FBA inventory reimbursement policy covers stock that is lost or damaged while it is in Amazon's care. That includes inventory lost or damaged inside a fulfilment centre, lost or damaged in transit between Amazon's facilities, not returned by a customer after a refund, or lost or damaged during a removal.
When Amazon accepts a claim, it pays you a cash reimbursement. Amazon generally values the reimbursement using the estimated sale price of the item, based on factors such as your recent selling price and comparable listings, rather than simply refunding what you originally paid for the goods.
A few practical points sellers often miss:
- On the amazon.com (US) marketplace, the window to file a manual claim for lost or damaged inventory was cut from 18 months to 60 days, effective 23 October 2024. For other marketplaces, including amazon.co.uk, the longer claim window applies, so check the current policy for your marketplace before assuming a deadline.
- Reimbursements can arrive as cash or, in some cases, as replacement stock. The tax treatment below is about cash reimbursements.
- A reimbursement is not the same thing as a customer refund. A customer refund reverses a sale. A reimbursement compensates you for stock Amazon mishandled.
That distinction matters, because it drives both the VAT answer and the income answer.
Is there VAT on an FBA reimbursement?
In most cases, an FBA reimbursement for lost or damaged stock is outside the scope of VAT. You do not add VAT to it, and it does not go in the VAT-able sales box on your return as a standard supply.
Here is the reasoning. VAT only applies where there is a supply made for consideration, and that needs a direct link and reciprocity between what is supplied and what is paid. HMRC's guidance is clear that a payment is only consideration for a supply where there is a legal relationship with reciprocal performance and a direct link between the service supplied and the payment received. Where that link is absent, the payment is outside the scope of VAT.
When Amazon loses or damages your stock and pays you for it, you are not supplying anything to Amazon in return. You have not sold Amazon the goods. You are being compensated for a loss. There is no reciprocal supply, so there is no VAT on the reimbursement itself.
This is the same principle HMRC applies to genuine compensation and damages payments generally, where the payment is for a loss rather than for something done in return.
When could VAT come into it?
A couple of nuances are worth knowing.
First, if you originally reclaimed input VAT on buying the stock that was later lost, you usually keep that input VAT. The goods were bought for your taxable business, so the original recovery stands; the later loss does not unwind it. Always keep the purchase invoice.
Second, the VAT treatment of "compensation" payments is fact-specific. HMRC's wider policy is that a payment described as compensation can sometimes be additional consideration for a supply if there is a real underlying supply it relates to. For a straightforward reimbursement of stock Amazon lost or damaged, there is no supply by you, so it stays outside scope. If you are unsure about an unusual payment, get it checked rather than guessing.
Are FBA reimbursements taxable as income?
Yes, in the normal case the reimbursement is a taxable trade receipt. You include it in your turnover or other trading income when you work out your taxable profit for the year.
The reason sits in HMRC's Business Income Manual. Where a recovery compensates a trader for a hole in the commercial profits, because an expected income did not materialise or an extra cost was incurred, it is a trading receipt. Compensation that is referable to your trading operations is normally a trade receipt.
Lost or damaged FBA stock is squarely a trading matter. You bought that stock to sell at a profit. When Amazon loses it and pays you, that money stands in for the trading income you would otherwise have made. So it is taxable trading income.
This holds whether you are a sole trader paying Income Tax and Class 4 National Insurance on your profits, or a limited company paying Corporation Tax. The reimbursement increases your profit either way.
There is an important corollary. Because the cost of buying that stock is a deductible business expense, you are not taxed twice. You deduct the purchase cost as a cost of sale and you bring in the reimbursement as income. The net taxable effect is the difference, which is broadly the margin Amazon's valuation built in. The worked example shows this.
Does the trading allowance change anything?
For most established FBA sellers, no. The £1,000 trading allowance lets you earn up to £1,000 of gross trading income tax-free in a tax year, and you do not deduct expenses if you use it. A serious FBA business is well past £1,000 of turnover, so the allowance is not in play and you account for income and expenses in the normal way. It is only relevant to very small side-hustle sellers.
Worked example: how the numbers land
Illustrative example. Priya runs an Amazon FBA homeware business as a sole trader. In 2025/26, Amazon loses a carton of her stock in a fulfilment centre. She had bought those units for £400 in total, and reclaimed nothing unusual on them. Amazon accepts the claim and reimburses her £620, based on the estimated sale price of the items.
Here is how the reimbursement flows through her accounts.
| Item | Amount | Tax treatment |
|---|---|---|
| Original cost of the lost stock | £400 | Allowable cost of sale (deductible) |
| FBA reimbursement received | £620 | Taxable trade receipt (income) |
| Net effect on taxable profit | £220 | Taxed as trading profit |
| VAT on the reimbursement | £0 | Outside scope of VAT (compensation, no supply) |
The £620 goes into her trading income. The £400 she paid for the stock is already a deductible cost. So the reimbursement adds £220 of taxable profit, which is the part that replaces the margin she would have earned on a normal sale.
If Priya is not VAT registered, there is no VAT step at all. If she is VAT registered, she still does not charge VAT on the £620, because there is no supply to Amazon. She keeps the input VAT she recovered on the original £400 purchase, supported by the supplier invoice.
These figures are illustrative. Your own numbers depend on what you paid for the stock and how Amazon values the claim.
How do you record reimbursements in your books?
The cleanest approach is to recognise reimbursements separately rather than letting them vanish into a net Amazon payout.
In practice we suggest:
- Pull the reimbursement detail from your Amazon reports, not just the lump-sum disbursement figure. Amazon nets sales, fees, refunds and reimbursements before paying you, so the headline payout hides what is going on.
- Post reimbursements to a clear income line, for example "FBA reimbursements", so they are visible at year end and obviously taxable income.
- Keep the original purchase invoices for the lost stock, so the cost of sale is evidenced and any input VAT you recovered is supported.
- Do not double count. If a unit was lost, it cannot also be sold. Make sure the same stock is not sitting in both a sale and a reimbursement.
Good ecommerce bookkeeping is what makes this painless. If you would rather not unpick Amazon settlement reports line by line, our bookkeeping services handle exactly this kind of reconciliation for Amazon sellers.
What about VAT returns and MTD?
If you are VAT registered, an FBA reimbursement that is outside the scope of VAT does not create output VAT to declare. You are not making a supply, so there is nothing to put in the VAT-due boxes for that payment.
Remember the registration position too. You must register for VAT once your VAT-taxable turnover goes over the £90,000 threshold (the current threshold from 1 April 2024). Reimbursements are compensation, not taxable supplies, so they do not by themselves count towards that turnover test. Your actual sales are what you watch.
If you are registered, Making Tax Digital for VAT applies to you. All VAT-registered businesses must keep digital VAT records and file returns using MTD-compatible software. That makes accurate categorisation of Amazon income, including reimbursements, even more important, because the numbers flow from your records straight into your return.
Does Amazon report my reimbursements to HMRC?
Under the digital platform reporting rules that started on 1 January 2024, online platforms collect and report seller information and income to HMRC. Amazon, as a platform, falls within these rules, and it gives you a copy of what it reports.
Two things to keep in mind:
- Receiving a platform report does not by itself mean you owe tax, and these rules are not a new tax. They are an information-sharing exercise. Whether tax is due depends on whether you are trading, which a real FBA business clearly is.
- A platform does not have to report sellers who make fewer than 30 sales of goods in a calendar year and receive 2,000 euros or less (around £1,700) for them. A genuine FBA business will be well over that.
The practical upshot is simple. HMRC increasingly sees your Amazon activity, so your return needs to match reality. Reimbursements are part of that reality and belong in your taxable income.
If you sell on Amazon, our accountants for Amazon FBA sellers deal with reimbursements, settlement reconciliation, VAT and self assessment as a matter of routine, so your figures are right and defensible.
Frequently asked questions
Are Amazon FBA reimbursements taxable in the UK?
Yes. A reimbursement for stock Amazon lost or damaged is normally a taxable trade receipt, because it compensates you for a hole in your trading profits. You include it in your trading income for the year, and your taxable profit reflects it net of the cost of the lost stock.
Is there VAT on Amazon FBA reimbursements?
Usually not. A reimbursement for lost or damaged stock is compensation for a loss, not payment for a supply you made to Amazon. With no direct link and reciprocity between a supply and the payment, it is outside the scope of VAT, so you do not charge VAT on it.
Do FBA reimbursements count towards the VAT registration threshold?
No. The £90,000 VAT registration threshold (current from 1 April 2024) is based on your VAT-taxable supplies. A reimbursement is compensation, not a taxable supply, so it does not count towards the threshold. Your sales are what you measure against it.
How is an FBA reimbursement different from a customer refund?
A customer refund reverses a sale you made, so it reduces your sales income. An FBA reimbursement is Amazon compensating you for stock it lost or damaged. The refund adjusts a sale; the reimbursement is separate compensation income. They are recorded differently in your books.
Do I pay tax twice if I claimed the stock cost as an expense?
No. You deduct the purchase cost of the lost stock as a cost of sale and you bring in the reimbursement as income. You are taxed only on the net effect, which is broadly the margin built into Amazon's valuation. Keep the purchase invoice as evidence of the cost.
Should I keep records of every reimbursement?
Yes. You must keep records of your business income, and reimbursements are income. Pull the reimbursement detail from Amazon's reports rather than relying on the net disbursement, post it to a clear income line, and keep the matching purchase invoices for the lost stock.
