Selling on Amazon has never been more accessible for UK small businesses. Whether you are a sole trader shifting handmade goods or a limited company moving thousands of units per month, Amazon's two primary fulfilment models — Fulfilled by Amazon (FBA) and Fulfilled by Merchant (FBM) — each offer a distinct set of trade-offs. Most sellers weigh up storage costs, delivery speeds, and Buy Box eligibility. Far fewer stop to consider the tax and accounting implications until they are staring down a VAT penalty or a confused accountant. This post unpacks those differences so you can make a genuinely informed decision — and manage your books properly whichever route you choose.
How the Two Models Work (and Why It Matters for Tax)
With FBA, you send your inventory to one or more of Amazon's UK fulfilment centres — such as those in Rugeley, Dunstable, or Swansea — and Amazon picks, packs, and ships orders on your behalf. Amazon also handles customer returns. With FBM, you retain the stock yourself (at home, in a rented warehouse, or via a third-party logistics provider) and dispatch orders directly to customers.
This distinction has immediate tax consequences. Under FBA, you are handing physical possession of your goods to a third party, creating a paper trail that includes inbound shipment fees, monthly storage charges, long-term storage fees, and FBA fulfilment fees — all of which are invoiced by Amazon and must be recorded in your accounts. Under FBM, your costs look more familiar: postage, packaging materials, and potentially warehouse rent. The starting point for good bookkeeping is recognising that these are structurally different expense profiles, not merely different line items.
VAT Obligations: Where FBA Gets Complicated
For UK VAT purposes, the fundamental rule is the same regardless of fulfilment model: once your taxable turnover exceeds £90,000 in any rolling 12-month period (the current 2024/25 threshold), you must register for VAT. Both FBA and FBM sellers are subject to this.
Where FBA creates a specific and often underestimated complication is in cross-border stock storage. If you enrol in Amazon's Pan-European FBA or European Fulfilment Network programmes, Amazon may move your inventory into fulfilment centres in Germany, France, Poland, or elsewhere within the EU. Under EU VAT rules, holding stock in a member state generally creates a VAT registration obligation in that country — even if you are a UK-based business selling from outside the EU post-Brexit. This is an area where many small UK sellers have been caught out, receiving demand letters from the German Bundeszentralamt für Steuern or the French Direction générale des finances publiques.
FBM sellers, by contrast, dispatch from the UK and are typically only liable for UK VAT (plus the destination country's import VAT, which falls on the buyer for B2C sales under the relevant distance-selling thresholds). The VAT picture is considerably simpler. If you are an FBA seller using cross-border programmes, you should speak to a VAT specialist and consider using Amazon's VAT Services or a dedicated fiscal representative in each relevant EU country.
Within the UK, both models must account for VAT correctly on each Amazon settlement. Amazon's Settlement Reports show your gross sales, refunds, and fee deductions — but they do not produce a VAT return for you. You must extract the correct VAT figures yourself. Under Making Tax Digital for VAT (MTD for VAT), those figures must be submitted digitally to HMRC via compatible software. Platforms like BizHub365 support direct MTD VAT API submission, which removes the need for bridging software and reduces the risk of transcription errors when reconciling your Amazon data.
Allowable Expenses: What You Can and Cannot Claim
Both FBA and FBM generate a range of allowable business expenses under HMRC's rules, but the specific costs differ meaningfully.
FBA sellers can typically claim:
- FBA fulfilment fees (picking, packing, and shipping charged by Amazon)
- Monthly and long-term inventory storage fees
- Inbound shipping costs to Amazon fulfilment centres
- Product prep costs (labelling, polybagging, bubble wrap at a prep centre)
- Amazon referral fees and subscription fees (Professional selling plan: £25/month + VAT)
- Sponsored Products advertising spend
FBM sellers can typically claim:
- Royal Mail, Evri, DPD, or other courier costs
- Packaging materials (boxes, tape, void fill, printed labels)
- Warehouse rent or a proportion of home office costs if dispatching from home
- Amazon referral fees and subscription fees
- Advertising spend
The critical point is correct categorisation. HMRC does not accept vague expense descriptions. If you are investigated, you will need to demonstrate that each claimed expense was incurred wholly and exclusively for business purposes. Mixing personal postage costs with business dispatch costs, for example, is a common mistake among sole traders running FBM operations from home.
Bookkeeping and Reconciliation Challenges
Amazon pays sellers every 14 days via a net settlement — meaning it deducts all fees, refunds, and adjustments before transferring the balance to your bank account. This creates an immediate reconciliation problem: the amount that lands in your account bears little resemblance to your gross sales figure, yet it is gross sales (not net receipts) that determine your VAT liability and your taxable income.
Every seller, FBA or FBM, needs to download and reconcile their Amazon Settlement Reports regularly. For FBA sellers, this report is longer and more complex — it includes dozens of line items covering storage fees, removal order fees, reimbursements for lost stock, and more. For FBM sellers, the report is shorter but still requires careful attention to refunds and partial refunds.
A practical approach is to reconcile each settlement period against your accounting software as soon as the payment clears. BizHub365's bank statement import feature can match incoming Amazon transfers to the correct settlement period, while its expense categorisation tools help ensure FBA fees are coded accurately — saving hours of manual work at year end and giving your accountant clean, auditable records.
Income Tax and Self Assessment Considerations
For sole traders, Amazon income — whether from FBA or FBM — is declared on your Self Assessment tax return under the self-employment pages. For limited companies, it forms part of your corporation tax computation. Either way, the profit figure that HMRC taxes is your gross revenue minus allowable expenses, so accurate expense recording directly reduces your tax bill.
One nuance specific to FBA is stock valuation. If you hold significant inventory in Amazon's fulfilment centres at your accounting year end, that stock must be valued and included on your balance sheet (for limited companies and for sole traders preparing accruals-basis accounts). Forgetting this can materially understate your assets and distort your profit figure. FBM sellers holding stock at home or in a rented unit face the same obligation, but it is often more visible and therefore less likely to be overlooked.
Amazon also issues a 1099-K form to US sellers — this is not relevant for UK sellers, who should focus instead on their Amazon UK Seller Central tax document library for VAT invoices and settlement summaries.
Conclusion: Choose Your Model With Your Books in Mind
FBA and FBM each suit different business models, product types, and growth strategies. But the choice is not purely operational. FBA brings greater complexity — particularly around EU VAT exposure, stock valuation, and a denser expense landscape — while FBM offers a simpler structure that is easier to manage with basic bookkeeping tools. Whichever model you use, the non-negotiables are the same: reconcile every Amazon settlement, categorise expenses correctly, meet your MTD for VAT obligations digitally, and value your stock at year end.
If you are spending more time wrestling with spreadsheets than growing your business, it is worth exploring a platform built around UK compliance from the ground up. BizHub365 was designed specifically for UK sole traders and small businesses, combining invoicing, VAT, and MTD-compliant submissions in one place — so your Amazon bookkeeping can work with your wider accounts rather than against them. You can explore the platform at bizhub365.co.uk.