Shopify Accounting UK: VAT, Fees and Bookkeeping Explained

Almost every problem in a Shopify store's books comes from one mistake: treating the payout as the sales figure. It is not, it never was, and the gap between the two contains your fees, your refunds and your VAT. This is how to record it properly.

Four figures, one deposit

For any period your store produces at least four numbers and only the last one reaches your bank.

1. Gross sales. What customers paid, including the shipping you charged them.
2. Gateway fees. What Shopify Payments, PayPal or Stripe kept for processing.
3. Refunds and chargebacks. What went back out, often relating to earlier orders.
4. The payout. The balance, on the gateway's own settlement cycle.

Post the payout as turnover and four things break at once. Your sales are understated. Your gateway fees are never claimed as a cost. Your VAT is calculated on the wrong base. And your gross margin is meaningless, because the fees have been buried inside the sales line.

The three gateways behave differently

Shopify Payments nets its fee and any refunds before paying out, so a single deposit can span two days of orders and contain a refund from last month. The payout report is the document you need, not the bank line.

PayPal holds a balance of its own. Money can sit in PayPal for weeks and is still your income on the date of the sale, not the date you sweep it to the bank. A store that only books PayPal when it transfers is reporting income in the wrong period.

Stripe settles on its own cycle and shows fees separately, which makes it the easiest of the three to reconcile provided you take the settlement report rather than the bank total.

Refunds, chargebacks and discounts are not the same thing

They often get coded identically and they should not be.

VAT for a UK online store

Registration is on gross taxable turnover, not on payouts. You must register once it passes £90,000 in any rolling twelve month period, or if you expect to pass it in the next thirty days alone. A store with £95,000 of sales and £88,000 of payouts has crossed the line.

What rate applies depends on what you sell and where it goes. Most goods to UK consumers are standard rated. Children's clothing, most food and books are zero rated. Goods exported out of the UK can be zero rated where you hold the evidence of export. Sales to EU consumers bring in the EU rules, where the one stop shop can let you account for several member states' VAT through a single return, and low value consignments have their own treatment. Digital products follow different rules again.

One point specific to selling on your own store rather than through a marketplace. The deemed supplier rules that make a marketplace account for the VAT apply to sellers who are not established in the UK. If you are a UK established business selling your own goods from your own Shopify store, you are the seller for VAT and you account for it yourself. That is a different answer from the one you get on Amazon or eBay, which our marketplace accounting guide covers.

If your catalogue is mixed, the products have to be mapped to the correct rate inside Shopify before any return can be relied on. This is the single most expensive thing to get wrong, in either direction.

Stock and cost of goods sold

Cost of goods sold is opening stock plus purchases less closing stock. The figure stores skip is the closing one, and because closing stock in one year becomes opening stock in the next, a guess puts the profit out in two years running. Count it, value it at cost, and keep the basis the same each year.

Landed cost is the other half. The unit price is not the cost of the product: freight, duty, import VAT where it is not recoverable, and fulfilment all belong in what it costs to put that item in a customer's hands. A store working on list price alone usually thinks its margin is several points better than it is.

Marketing is not a cost of sale, but it is the number to read next to the gross margin. A strong gross margin and a thin contribution after advertising is the most common way a growing store runs out of cash while the sales graph looks excellent.

A monthly routine that works

• Export the Shopify sales report for the month, split by VAT treatment.
• Export each gateway's settlement or payout report.
• Post sales gross, fees as a cost, refunds and chargebacks separately.
• Reconcile the payouts to the bank, and leave nothing unexplained.
• Record purchases at landed cost, and adjust stock at least quarterly.
• Read gross margin, fees as a percentage of sales, and contribution after advertising.

Do that and the VAT return is a by product rather than a project, and the year end accounts are a summary of something you already understood.