Cost of goods, Amazon fees, VAT, import duty, stock valuation and MTD explained for UK sole traders selling through Fulfilment by Amazon.
Selling through Fulfilment by Amazon looks simple from the outside: source a product, ship it into Amazon, and watch deposits land in your bank every two weeks. The tax reality underneath is one of the trickiest of any sole-trader trade. The money Amazon pays you is already net of referral fees, FBA fulfilment fees, storage and advertising, so the figure in your bank account is not your turnover and it is nowhere near your profit. Build your Self Assessment on the deposit number and you will both understate your sales and lose the deductions you were entitled to.
This guide is built around how an FBA business actually works: gross sales versus settlement deposits, cost of goods sold and stock valuation, the full stack of Amazon fees, import VAT and duty, and the VAT and MTD thresholds that catch high-turnover sellers far earlier than they expect.
As a sole trader you pay Income Tax on profit, which is your total sales income minus allowable expenses. For 2025/26 the personal allowance covers the first GBP 12,570, then you pay 20% to GBP 50,270, 40% to GBP 125,140 and 45% above, with the personal allowance tapering away between GBP 100,000 and GBP 125,140 to create an effective 60% band. Class 4 National Insurance is 6% on profit between GBP 12,570 and GBP 50,270 and 2% above, with Class 2 NIC settled through Self Assessment.
Scottish sellers pay Scottish Income Tax across six bands (19%, 20%, 21%, 42%, 45% and a 48% top rate) and carry an S-prefixed tax code, while National Insurance stays UK-wide. Welsh sellers have a C-coded tax code at rates currently matching the rest of the UK. If a part-time PAYE job or a previous employment is distorting your code, run it through the tax code checker so your freelance profit is not taxed on the wrong assumptions.
This is where most FBA sellers go wrong before they have even started. Amazon's settlement report nets everything off and pays you the remainder. Your turnover for tax is the gross sales value your customers paid, and the fees Amazon took are then claimed back as expenses.
The practical fix is to pull Amazon's date-range settlement report each period and book the gross sales, then the fees, separately. This also keeps your turnover figure honest, which is essential because the VAT and MTD tests look at gross sales, not the slimmer deposit total.
The single biggest deduction for a product business is the cost of the stock you sold, but you can only deduct what actually sold. Inventory sitting in an Amazon fulfilment centre at your year end is closing stock and carries forward.
A seller who buys GBP 40,000 of stock but only sells GBP 25,000 of it does not get a GBP 40,000 deduction; they deduct GBP 25,000 of COGS and carry GBP 15,000 of closing stock forward. Claiming the full purchase figure inflates expenses, understates profit and is exactly the kind of error HMRC looks for in a product business. Keep a simple inventory record: units in, unit cost, units sold, units remaining. See our cost of goods sold explainer for the full calculation.
Many sellers test the water with a few products before committing. The GBP 1,000 trading allowance covers this: if your gross sales from all self-employment are GBP 1,000 or less in a tax year, it is tax-free and you need not register for Self Assessment. Note this is GROSS sales, not profit, so a seller who turns over GBP 3,000 but barely breaks even is still over the threshold and must register.
Once over GBP 1,000 you can deduct either the flat GBP 1,000 allowance or your actual expenses, whichever gives the lower profit. For almost every FBA seller, actual costs (stock, fees, shipping) dwarf GBP 1,000, so you will claim real expenses. The allowance mainly helps the genuine micro-seller in their first months.
An expense is allowable when incurred wholly and exclusively for the business. For FBA the list is long because Amazon charges for almost everything.
| Expense | What qualifies | Notes |
|---|---|---|
| Cost of goods sold | Wholesale/manufacturing cost of stock actually sold | Only sold units; value closing stock at year end |
| Amazon referral fees | The percentage Amazon takes per sale | On the settlement report; deduct from gross sales |
| FBA fulfilment fees | Pick, pack and ship fees per unit | Fully deductible |
| Storage fees | Monthly and long-term storage charges | Long-term fees on aged stock are deductible |
| Selling plan fee | The monthly Professional plan subscription | Fully deductible business cost |
| Advertising | Sponsored Products, Brands and external ads | Fully deductible |
| Inbound shipping and freight | Sea/air freight, courier to Amazon | Often capitalised into stock cost |
| Import duty and clearance | Customs duty, broker and clearance fees | Duty forms part of stock cost; import VAT is separate |
| Prep, packaging and labelling | FNSKU labels, poly bags, prep-centre fees | Fully deductible |
| Software | Repricers, inventory tools, accounting software | Subscriptions fully deductible |
| Product photography and listing | Photography, copywriting, A+ content | Fully deductible |
| Samples and product research | Sourcing samples, research tools | Allowable where business-related |
| Home-office costs | Flat-rate working-from-home allowance or a fair share of running costs | Choose the larger fair deduction |
| Accountancy and bank fees | Bookkeeping, Self Assessment, business banking | Fully deductible |
Customs duty is a cost of getting goods to a saleable state, so it generally forms part of your stock cost and flows through COGS. Import VAT is different: if you are VAT-registered you reclaim it on your VAT return rather than treating it as an expense, using your monthly C79 certificate (or postponed VAT accounting). If you are not yet VAT-registered, import VAT is a real cost you cannot reclaim, which is one reason high-volume importers often register voluntarily.
The cost of unsold stock (it is closing stock, not an expense), the private share of dual-use broadband or phone, everyday clothing, fines or penalties from Amazon, and the capital you withdraw as drawings are not deductible. Entertaining and gifts to customers are also generally disallowed.
Take a sole trader selling private-label products through FBA, turning over GBP 70,000 of gross sales in the year, before Amazon's fees.
Gross sales: GBP 70,000
Allowable expenses:
Taxable profit: GBP 70,000 minus GBP 53,400 = GBP 16,600
Income Tax: GBP 16,600 minus GBP 12,570 = GBP 4,030 at 20% = GBP 806
Class 4 NIC: GBP 4,030 at 6% = GBP 242
Total tax and NIC: roughly GBP 1,048 for the year. Note how a GBP 70,000-turnover business produces a modest profit yet is already comfortably over the GBP 50,000 MTD threshold because that test is on gross sales. Run your own figures through the sole trader tax calculator, and if you also draw a salary or other income use the multiple-income calculator.
The Amazon deposit is not your turnover and it is not your profit. Report gross sales, deduct every fee, and only deduct the stock you actually sold. Get those three right and an FBA return is straightforward.
VAT catches FBA sellers earlier than almost any other trade because the GBP 90,000 registration threshold is tested on rolling 12-month gross sales, not profit. A high-turnover, low-margin seller can cross it while making very little. Once registered you charge 20% VAT on standard-rated sales, reclaim VAT on Amazon fees and import VAT, and file under Making Tax Digital for VAT.
Two marketplace wrinkles matter. First, Amazon collects and remits VAT on behalf of non-UK established sellers and on imported consignments valued at GBP 135 or less, so the VAT flowing through your account is not always yours to keep or pay. Second, if you sell into the EU you may need EU VAT registrations or the Import One-Stop Shop (IOSS), which sits outside UK VAT entirely. If you are approaching GBP 90,000, register early and price VAT into your margins before HMRC backdates a liability you never collected.
Making Tax Digital for Income Tax replaces the once-a-year return with quarterly digital submissions and a year-end finalisation. The thresholds are based on gross income, not profit:
For FBA sellers the gross-income test is the sting in the tail. Because turnover is measured on gross sales before Amazon's fees, a seller with healthy revenue but thin margins is pulled into MTD well before their profit would suggest. The upside is that connecting your bookkeeping to your settlement reports and filing quarterly forces the disciplined, continuous record-keeping a product business needs anyway. Our guide to MTD for sole traders walks through the quarterly rhythm in practice.
Keep your Amazon date-range settlement reports, supplier invoices, freight and customs paperwork (C79s if VAT-registered), advertising statements and an inventory log of units in, unit cost and units sold. Reconcile the settlement deposits to your bank monthly so nothing slips. On National Insurance, Class 4 at 6% then 2% is calculated automatically from your profit, and Class 2 is settled through the same Self Assessment return; if your profit is low, voluntary Class 2 can still be worth paying to protect your State Pension record.
Reporting the net Amazon deposit as turnover. It is net of fees. Report gross sales and deduct the fees, or you understate both turnover and deductions.
Claiming all stock purchased instead of stock sold. Unsold inventory is closing stock carried forward, not a current-year expense.
Missing the VAT threshold because they watch profit. VAT is tested on gross sales; high-turnover sellers cross GBP 90,000 fast.
Confusing import VAT with import duty. Duty goes into stock cost; import VAT is reclaimed on the VAT return if you are registered.
Assuming a PAYE job's allowance covers selling profit. If a day job already uses your personal allowance, every pound of FBA profit is taxed from the basic rate up.
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