A customer returns a jumper, you refund them in Shopify, and the money leaves your Stripe or Shopify Payments balance. Simple enough. The bit that trips people up is what happens to the VAT you already charged on that sale, and how the chargeback that lands three weeks later is different from a refund even though both reduce your takings.
Get this wrong and one of two things happens. You overpay VAT on sales you didn't actually keep, or you under-declare and leave an error waiting for HMRC to find. Neither is necessary.
This guide is for VAT-registered Shopify sellers who want to record refunds and chargebacks so the revenue reverses cleanly and the VAT lands in the right box, on the right return, at the right time. We'll walk through the rules, a worked example with current figures, and a VAT-return-box breakdown you can copy.
What is the difference between a refund and a chargeback?
A refund is you choosing to give the customer their money back. A chargeback is the customer's bank forcing the money back, usually after a dispute, and Shopify deducts it from your balance whether you agree or not.
For your books, both reduce the value of the original sale, so in most cases both reverse the same revenue and the same output VAT. The practical differences are in the timing, the fees, and the paperwork you keep.
| Feature | Refund | Chargeback |
|---|---|---|
| Who initiates it | You (the seller) | The customer's card issuer |
| Trigger | Return, cancellation, goodwill | Disputed or fraudulent transaction |
| Money movement | You push the refund out | Bank pulls it from your balance |
| Extra cost | None from the card network | A chargeback fee from your processor |
| Can you contest it | Not applicable | Yes, by submitting evidence |
| Revenue treatment | Reverse the sale | Reverse the sale (if lost or accepted) |
The VAT principle behind both is the same one HMRC calls a "decrease in consideration": the amount the customer ultimately paid for the supply has gone down, so the VAT on that supply comes down too.
When can you reverse the VAT on a Shopify refund?
You can reduce your output VAT once you have actually made the refund to the customer. An agreed or processed-but-not-paid refund is not enough on its own.
That is the core rule under Regulation 38 of the VAT Regulations 1995. A decrease in consideration only happens, for VAT, "when the supplier makes the refund to the customer or other person entitled to receive the payment". You then issue a credit note to the customer, and you must do that within 14 days of making the refund. The 14-day clock starts from the refund, not from the day you agreed it. VATREC13070
VAT Notice 700 puts it plainly: a business can only reduce the output VAT on its return if it has made an actual refund, whether by paying the customer or by offsetting the credit against other invoices. VAT Notice 700, section 18
For most Shopify sellers this is automatic. When you process a refund in the Shopify admin, the money genuinely leaves your account, so the "real world refund" test is met on that date. A chargeback that you lose or accept is also a real world reduction, because the funds have left your balance.
What does a valid VAT credit note need?
A credit note backing a VAT reversal has to do its job as evidence. HMRC's conditions for a valid credit note are that it must be issued to the customer, reflect a genuine agreed reduction, give real value to the customer, be issued in good faith, and not be used in place of bad debt relief. VATREC13040
It should also carry the standard details: an identifying number and date, your name, address and VAT number, the customer's details, the reason for the credit, a description of the goods or services, the amount credited and the VAT, and a reference to the number and date of the original invoice. If returned goods cannot be tied to a specific invoice, you must be able to satisfy HMRC by other means that you accounted for VAT on the original sale. VAT Notice 700, section 18
In practice Shopify generates a refund record and you can attach or generate a credit note against the original order, which gives you the audit trail. The key is that it links back to the original sale.
Which VAT return period does the reversal go in?
The adjustment goes in the VAT return for the period in which you actually made the refund, not the period of the original sale.
HMRC's guidance on the timing of Regulation 38 adjustments is specific. The adjustment to your VAT account must be made "in the accounting period in which the decrease in consideration occurs", and that is when the supplier pays the refund to the customer. VATREC13080
So if you sold an item in March, fell into your March VAT quarter, then refunded it in May, the sale sits in the first return and the reversal sits in the next one. You do not go back and amend the original return. You also do not wait for the credit note date; the trigger is the payment leaving your account.
This matters at quarter boundaries. A refund processed on the last day of a quarter belongs in that quarter. One processed on the first day of the next belongs in the next. Reconcile your Shopify payouts to the refund dates, not the order dates, when you draw the line.
How do refunds and chargebacks hit your VAT return boxes?
Both reduce Box 1 (the VAT you owe) and Box 6 (the net value of your sales). You net the reversal off against your other sales for the period rather than entering negative figures, unless the period genuinely nets negative.
Here is how each box behaves for a standard-rated UK sale that you later refund. The standard VAT rate is 20% for the current period. VAT rates
| Box | What it holds | Effect of a refund or accepted chargeback |
|---|---|---|
| Box 1 | VAT due on your sales (output tax) | Reduced by the VAT element of the refunded sale |
| Box 4 | VAT you reclaim on purchases (input tax) | No change for the refund itself |
| Box 6 | Total net value of your sales | Reduced by the net (ex-VAT) value of the refunded sale |
| Box 7 | Total net value of your purchases | No change for the refund itself |
VAT Notice 700/12 confirms the mechanism for Box 1: you deduct any VAT on credit notes you issue and any VAT when you make refunds to customers, which lowers your output tax for the period. VAT Notice 700/12
Because Box 5 is simply Box 3 minus Box 4, reducing Box 1 flows through to a lower net VAT bill automatically. You don't touch Box 4 or Box 7 for the refund of the sale itself. Those only move when you're dealing with the fees, which we cover below.
Worked example: a refund and a chargeback in one quarter
Illustrative example. Maya runs a homeware store on Shopify and is VAT registered. All her sales are standard-rated at 20%. In her VAT quarter she makes £30,000 of net sales, so £6,000 of output VAT, giving £36,000 gross. She has two reversals in the same quarter.
First, a refund. A customer returns a £120 (gross) lamp. Maya refunds it in full through Shopify on 12 May.
- Net sale being reversed: £120 / 1.2 = £100
- VAT being reversed: £100 x 20% = £20
Second, a chargeback. A customer disputes a £240 (gross) order on their card. Maya can't win the dispute and accepts it, so the funds leave her balance on 20 May. Shopify also charges her a £10 chargeback fee.
- Net sale being reversed: £240 / 1.2 = £200
- VAT being reversed: £200 x 20% = £40
Now Maya nets both reversals off her quarter's figures.
| Line | Net (Box 6) | VAT (Box 1) |
|---|---|---|
| Gross sales for the quarter | £30,000 | £6,000 |
| Less refunded lamp | -£100 | -£20 |
| Less accepted chargeback | -£200 | -£40 |
| Adjusted totals | £29,700 | £5,940 |
Maya declares £5,940 in Box 1 and £29,700 in Box 6 (plus any other outputs). The arithmetic checks out: £6,000 minus £20 minus £40 is £5,940, and £30,000 minus £100 minus £200 is £29,700. The £10 chargeback fee is handled separately, as a cost, which we'll deal with next. It is not part of the sales reversal.
Notice what Maya did not do. She didn't amend the earlier return that carried the original lamp sale, and she didn't enter VAT on the chargeback fee as if it reduced her sales. The reversal is clean and sits entirely in the quarter the money moved.
How do you record the chargeback fee and Shopify's fees?
Treat the chargeback fee and your monthly Shopify or Stripe fees as business costs, not as part of the sales reversal. Where VAT applies to them, it goes through Box 4 as input tax, never against your output VAT on sales.
Shopify is an overseas supplier to a UK business. Its subscription and transaction fees to a VAT-registered UK seller generally fall under the reverse charge, which means you account for the VAT as both output and input tax on the same return and, if you can recover it in full, there's no net cost. Reverse charge: services to which it applies We've covered the box-by-box mechanics for these in our guide to the reverse charge on Shopify fees.
The point to hold on to here is the separation. A refund reduces your sales (Box 1 and Box 6). A fee is a purchase (Box 4 and Box 7, subject to the reverse charge rules for an overseas supplier). Mixing them is the single most common Shopify VAT error we see, and it quietly distorts both your turnover and your VAT position.
If you'd rather not unpick payout statements line by line every quarter, this is exactly the sort of reconciliation our bookkeeping service for Shopify sellers takes off your plate.
What about partial refunds, restocking fees and non-returns?
A partial refund reverses only the portion you actually pay back. If you refund half the order value, you reverse half the net sale and half the VAT, on the date the partial refund leaves your account.
Restocking fees and similar deductions need care. If you refund £80 of a £100 (net) sale and keep £20 as a restocking charge, you've still made a supply for £20 in substance, so you reverse the £80 portion (£16 VAT) and keep output VAT on the £20 you retained. The reversal follows the money that genuinely went back to the customer.
There's also the situation where money has not yet been paid back at all, for example a disputed invoice you never expect to recover. That is not a Regulation 38 refund, because there's been no real world repayment. It may instead be a candidate for VAT bad debt relief, which is a different regime: the debt has to be over six months old (measured from the later of when payment was due and the supply date), written off in your accounts, and you claim the VAT back through Box 4, not by reducing Box 1. The claim window is four years and six months. Relief from VAT on bad debts (Notice 700/18)
For day-to-day Shopify trading you'll rarely need bad debt relief, because card payments either clear or get charged back. But it's worth knowing the line: refund equals reduce Box 1, bad debt equals reclaim through Box 4.
Frequently asked questions
Do I reverse VAT on a Shopify refund in the original sale's VAT period or the refund period?
The refund period. The VAT adjustment goes in the return covering the period in which you actually made the refund to the customer, which is when the money leaves your account. You don't reopen or amend the original return.
A chargeback took money from my Shopify balance. Can I reverse the VAT?
Yes, if you lose or accept the chargeback, because the funds have genuinely left your account, which meets HMRC's "actual refund" test. Reverse the net value from Box 6 and the VAT element from Box 1 in the period the chargeback hit your balance. If you successfully contest it and the funds return, there's nothing to reverse.
Is there VAT on the Shopify chargeback fee?
The chargeback fee is a cost to your business, not part of the sales reversal. Because Shopify is an overseas supplier, its fees to a VAT-registered UK business are generally dealt with under the reverse charge, so any VAT is accounted for through Boxes 1 and 4 and is recoverable as input tax if your sales are taxable. It never reduces the output VAT on your own sales.
Do I need a credit note for every Shopify refund?
To reduce your output VAT you need a valid credit note issued to the customer within 14 days of making the refund, linked to the original invoice or order. Shopify's refund record plus a credit note against the order gives you the audit trail HMRC expects.
What if I only refund part of an order?
You reverse only the part you actually pay back. Refund half, reverse half the net value and half the VAT. If you keep a restocking fee, you've still made a supply for that retained amount, so output VAT stays on the portion you kept.
My customer never paid and I can't refund them. Is that the same thing?
No. With no real world repayment there's no Regulation 38 reversal. An unpaid debt is potentially a VAT bad debt relief claim instead: the debt must be over six months old, written off in your books, and you reclaim the VAT through Box 4, not by reducing Box 1.
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Key takeaways
- Refunds and chargebacks both reverse the original sale: reduce Box 1 (output VAT) and Box 6 (net sales).
- You can only reverse output VAT once you've made an actual refund or the chargeback funds have genuinely left your account.
- The reversal goes in the VAT period the money moved, not the period of the original sale. Never amend the old return.
- Issue a valid credit note within 14 days of the refund, linked to the original order.
- Chargeback fees and Shopify's fees are costs handled through Box 4 (under the reverse charge for an overseas supplier), never against your sales VAT.
- Unpaid debts with no refund are bad debt relief territory, claimed through Box 4 after six months, not a Regulation 38 reversal.
Refunds and chargebacks are routine, but the VAT timing and the box-by-box treatment are where Shopify sellers lose money or invite errors. If you'd like your refunds, chargebacks and platform fees reconciled and your VAT returns filed correctly every quarter, talk to a Zmartly accountant who works with Shopify sellers.
