A buyer returns a jacket, you refund them through eBay, and the money leaves your account. Simple enough on the platform. In your books it's less simple, because that refund has to unwind both the sale you recorded and the VAT you charged, in the right amounts and in the right VAT period.
Get it wrong and you either overpay VAT to HMRC on a sale that never really happened, or you understate your output tax and risk an error correction later. Partial refunds and marketplace-collected VAT make it fiddlier still.
This is a practical, how-to guide for VAT-registered eBay sellers (and a useful primer if you're not yet registered). We'll cover how to reverse revenue, which VAT return boxes change, how partial refunds work, what to do when eBay collected the VAT for you, and the margin scheme wrinkle for second-hand goods. Every rule is tied to the relevant HMRC guidance.
How do you account for an eBay refund in your books?
A refund reverses the original sale. You reduce your recorded sales (revenue) by the net amount and reduce your output VAT by the VAT element, in the VAT period in which you actually pay the refund to the buyer.
That last part matters. Under VAT law you can only adjust your output tax once there has been a real refund of money to the customer, not when the return is merely agreed or the item is on its way back. HMRC's guidance on Regulation 38 is explicit: a decrease in consideration occurs when the supplier makes the refund, and adjustments for decreases cannot be made unless there has been a "real world" refund to the customer (VATSC06635).
So the trigger for your bookkeeping entry is the refund date, not the return-request date.
Contents
- Why a refund is not just a negative expense
- Which VAT return boxes change when you refund a buyer?
- Worked example: a full refund on a standard-rated sale
- How do partial refunds and price reductions work?
- Do you need to issue a credit note for an eBay refund?
- What if eBay collected the VAT, not you?
- How are refunds handled under the VAT margin scheme?
- What about refunds that cross a VAT period or a tax year?
- A decision walkthrough for any eBay refund
- FAQs
Why a refund is not just a negative expense
The single most common mistake we see is treating an eBay refund as a cost, posting it to a "refunds" expense line or netting it against postage. It isn't a cost. It's the cancellation of income.
If you book a refund as an expense, your turnover stays overstated and, if you're VAT-registered, your output VAT stays overstated too. You'll have paid HMRC tax on a sale that was reversed.
The correct treatment is a reduction of revenue. In most accounting software this is a credit note against the original sale, or a sales return posting, which reduces your sales figure and your VAT control account together. The eBay refund fee and any postage you don't recover are separate matters and stay as costs.
Which VAT return boxes change when you refund a buyer?
For a standard UK sale where you charged and accounted for the VAT, a refund reduces two boxes on your VAT return.
HMRC's VAT return guidance tells you to deduct the VAT on credit notes you issue from your Box 1 output VAT, and to reduce your Box 6 net outputs by the value of the refund excluding VAT (VAT Notice 700/12).
| VAT return box | What it normally shows | Effect of a customer refund |
|---|---|---|
| Box 1 | VAT due on your sales (output tax) | Reduce by the VAT element of the refund |
| Box 6 | Total value of sales, excluding VAT | Reduce by the net (VAT-exclusive) value of the refund |
You don't touch Box 4 or Box 7. Those are about VAT you reclaim on your purchases. A refund to your buyer is a reversal of your sale, so it lives on the output side.
If the original sale and the refund fall in the same VAT period, you can simply net them off, your records just show the reduced amount. If they fall in different periods, you make the adjustment in the period the refund is paid (VATSC06635).
Worked example: a full refund on a standard-rated sale
Illustrative example. Priya runs an eBay clothing shop and is VAT-registered. She sells a coat for £60, VAT-inclusive, at the standard rate of 20% (the current standard rate). A week later the buyer returns it and Priya refunds the full £60 through eBay.
First, split the original sale into net and VAT:
- Gross sale: £60.00
- Net (£60 ÷ 1.2): £50.00
- Output VAT (£50.00 × 20%): £10.00
When Priya pays the refund, she reverses exactly those figures:
| Line | Amount |
|---|---|
| Reduce Box 6 (net sales) | £50.00 |
| Reduce Box 1 (output VAT) | £10.00 |
| Total refunded to buyer | £60.00 |
Net effect on this sale: nil revenue, nil VAT, as if it never happened. The eBay selling fee that Priya was charged is a separate cost and stays in her expenses (eBay may credit part of it back, which is its own entry).
How do partial refunds and price reductions work?
A partial refund follows the same logic, you just apply it to the portion you refund. You reverse the net and VAT in the same 20% proportion as the original sale, because you're reducing the consideration, not changing the VAT rate.
Illustrative example. Priya sells a pair of boots for £90 including VAT. The buyer reports a scuff and, rather than take a full return, agrees to keep them for a £30 partial refund.
- Original sale: £90 gross = £75.00 net + £15.00 VAT
- Partial refund of £30 gross = £25.00 net + £5.00 VAT
So Priya reduces Box 6 by £25.00 and Box 1 by £5.00. The sale she retains is £60 gross (£50.00 net + £10.00 VAT). The maths reconciles: £75 net less £25 net leaves £50 net, and £15 VAT less £5 VAT leaves £10 VAT.
The same approach covers goodwill discounts and post-sale price reductions. The key is that the refund must actually be paid for you to adjust the VAT. A discount you offer but never pay out gives you nothing to reverse (VATSC06635).
Do you need to issue a credit note for an eBay refund?
For VAT purposes, where you reduce the price after a sale, the mechanism HMRC expects is a credit note. The supplier issues a credit note to reflect the decrease, and the 14-day window for issuing it starts once the refund has been made to the customer (VATSC06635).
In a marketplace setting you don't usually hand the buyer a paper credit note. eBay's refund confirmation and your transaction records evidence the refund. What matters for HMRC is that your VAT account shows the adjustment and you can support it.
This is a routine adjustment, not an error. HMRC draws a clear line: adjustments you make as part of the normal operation of VAT accounting, such as credit notes, are not errors, provided they're accurate and made at the right time (VAT Notice 700/45). You only get into error-correction territory if you find a past return was wrong (see below).
What if eBay collected the VAT, not you?
This is where eBay accounting diverges from a standalone web shop. In several situations eBay is treated as the supplier for VAT and accounts for the VAT itself. When that happens, the VAT is not yours to reverse on a refund.
eBay (an online marketplace) is liable for the VAT, not the seller, in two main cases:
- Imported consignments of £135 or less sold to UK customers. UK supply VAT is charged at the point of sale and the marketplace accounts for it. The £135 applies to the whole consignment, not each item (VAT and overseas goods sold using online marketplaces).
- Goods already in the UK at the point of sale that are owned by an overseas seller. The marketplace is liable for the VAT and charges it when the goods are sold (Charging VAT when using an online marketplace).
If you're a UK-established seller holding stock in the UK, you are the supplier and you charge and account for your own VAT in the normal way, so the boxes above apply to your refunds.
The practical rule: only reverse VAT you actually accounted for. If eBay collected and remitted the VAT on a sale, then on a refund you reverse only your own income, eBay handles the VAT side. Reversing VAT you never paid to HMRC would understate your output tax. If you're not sure which sales eBay collected VAT on, your eBay VAT reports and transaction-level data will show it, and it's worth a settled process here because it's a frequent source of error.
If you're weighing up registration, the VAT registration threshold is £90,000 of taxable turnover (current threshold from 1 April 2024). Marketplace-collected VAT and how it interacts with your own turnover is one of the things our ecommerce accounting team untangles for sellers most often.
How are refunds handled under the VAT margin scheme?
Many eBay sellers deal in second-hand or pre-owned goods and use a VAT margin scheme. Under a margin scheme you account for VAT only on your margin (the difference between what you paid for an item and what you sold it for), not on the full selling price (VAT margin schemes).
That changes what a refund reverses. If an item sold under the margin scheme is returned and refunded, you remove that sale from your margin calculation for the period and adjust your stock book accordingly. There's no full-price output VAT to reverse, because you never charged VAT on the full price, only on the margin. If the item goes back into stock to be resold, your records need to reflect that it's available again.
Margin scheme bookkeeping is unforgiving about records. HMRC requires a stock book with purchase and sale details for every item, and your margin and the VAT on it are worked out from that book (VAT margin schemes: records you must keep). A returned item that isn't backed out of the stock book will distort your margin for the period.
What about refunds that cross a VAT period or a tax year?
Timing is the part sellers most often get wrong, so it's worth being precise.
You make the VAT adjustment in the period in which the refund is paid. If you sold an item in your March quarter and refunded it in your June quarter, the reversal goes in the June return, not back into March (VATSC06635). You don't reopen the earlier return.
If you're on the Cash Accounting Scheme, the same principle holds: where you've already accounted for VAT on a payment, you adjust your VAT account when the refund is made, and no adjustment is needed if the price change is agreed before any money has changed hands (Cash Accounting Scheme, VAT Notice 731).
A genuine refund posted in the current period is an ordinary adjustment, not an error. You'd only use HMRC's error-correction process if you discover a past return was actually wrong, for example you forgot to record a refund and overpaid VAT in a closed period. In that case Method 1 lets you adjust on your next return where the net error is below £10,000, or below £50,000 and under 1% of your Box 6 figure; larger errors must be reported separately, and there's a 4-year time limit (VAT Notice 700/45).
For income tax and your accounts, the refund reduces turnover in the period it relates to under the accruals basis, so a refund straddling 5 April should land in the year the sale belongs to. If you use the cash basis, you follow the money. Either way, keep refunds out of expenses.
Period summary: putting refunds through the VAT return
Illustrative example. In a quarter, Priya's gross eBay sales on which she accounted for VAT were £12,000 (VAT-inclusive), and she paid out £900 of refunds (VAT-inclusive) on those same standard-rated sales. Her net position:
| Item | VAT-inclusive | Net (Box 6) | VAT (Box 1) |
|---|---|---|---|
| Standard-rated sales | £12,000 | £10,000.00 | £2,000.00 |
| Less refunds paid | (£900) | (£750.00) | (£150.00) |
| Net for the return | £11,100 | £9,250.00 | £1,850.00 |
Check: £9,250 net × 20% = £1,850 output VAT, and £9,250 + £1,850 = £11,100. Box 6 shows £9,250 and Box 1 shows £1,850. This excludes any sales where eBay collected the VAT.
A decision walkthrough for any eBay refund
When a refund lands, work through these questions in order:
- Did I account for the VAT on this sale, or did eBay? If eBay collected it (overseas-seller stock in the UK, or an imported consignment of £135 or less), reverse only your income, not VAT. If you accounted for it, continue.
- Is it a full or partial refund? Full reverses the whole sale. Partial reverses the same proportion of net and VAT.
- Was the sale under the margin scheme? If so, back the item out of your margin calculation and stock book rather than reversing full-price VAT.
- Has the money actually been refunded? You can only adjust VAT once the refund is paid, not when the return is agreed.
- Which period is the refund in? Make the adjustment in the period the refund is paid. Don't reopen the earlier return.
- Post it as a reduction of revenue, never as an expense, and keep the eBay refund confirmation as evidence.
Run that sequence every time and your VAT and your turnover stay honest.
FAQs
Is an eBay refund treated as an expense or a reduction in sales?
It's a reduction in sales, not an expense. Posting it as a cost leaves your turnover and, if you're registered, your output VAT overstated. Reverse the net amount against revenue and the VAT element against your output tax.
Which VAT boxes do I change when I refund an eBay buyer?
For a sale where you charged the VAT, reduce Box 1 by the VAT element of the refund and Box 6 by the net (VAT-exclusive) amount. You don't touch Box 4 or Box 7, which relate to VAT on your purchases.
When can I reverse the VAT, when the item is returned or when I refund the money?
When you actually pay the refund. HMRC only allows a VAT adjustment once there has been a real refund of money to the customer, so the trigger is the refund date, not the return request.
Do I reverse VAT on a refund if eBay collected the VAT?
No. If eBay was liable for the VAT (for example an imported consignment of £135 or less, or an overseas seller's stock held in the UK), you reverse only your own income on a refund. The VAT was never yours to account for or to reverse.
How do partial refunds affect VAT?
You reverse the same proportion of net and VAT as the original sale. A £30 partial refund on a 20% standard-rated sale reverses £25 of net sales and £5 of VAT, because the refund includes VAT at the same rate the sale did.
What if I refund a sale after the VAT period has closed?
Make the adjustment in the period you pay the refund, not the original one. A current-period refund is a normal adjustment, not an error. You'd only use HMRC's error-correction process if a past return was genuinely wrong.
Talk to an e-commerce accountant →
Key takeaways
- A refund cancels income; reverse it against revenue, never as an expense.
- For your own VAT, reduce Box 1 by the VAT and Box 6 by the net, in the period you pay the refund.
- Partial refunds reverse the same proportion of net and VAT as the original sale.
- If eBay accounted for the VAT, reverse only your income, not the VAT.
- Margin scheme sales reverse through the stock book and margin, not full-price VAT.
Refund accounting on eBay is easy to get subtly wrong, especially once marketplace-collected VAT and partial refunds are in the mix. If you'd like it handled cleanly and your VAT returns filed right, talk to Zmartly's accountants for eBay sellers and we'll set up a process that keeps your numbers straight.
