Running an online shop in the UK comes with a specific set of accounting challenges that a traditional high-street business simply doesn’t face, platform fees, multi-currency sales, overseas VAT rules and stock management all need to be handled correctly from day one. This guide covers the accounting basics every UK e-commerce seller needs to understand, whether you sell on Shopify, Amazon, Etsy, eBay or your own website.
- Choosing the right business structure
- Bookkeeping basics for online sellers
- VAT and e-commerce
- Stock and cost of goods sold
- Platform fees and payment processor charges
- Income tax and corporation tax
- Accounting software for e-commerce
- Cash flow and working capital
- Making Tax Digital and e-commerce
- Frequently asked questions
Choosing the Right Business Structure
Before you worry about spreadsheets and VAT returns, you need the right legal structure. Most UK e-commerce sellers start as sole traders or set up a limited company. The choice affects how you pay tax, what records you keep and how much personal liability you carry.
Sole trader
If you run your shop as a sole trader, your business profits are taxed as personal income through self assessment. It is the simplest structure to set up, but you are personally liable for any debts the business runs up.
Limited company
A limited company is a separate legal entity. You pay yourself a salary and dividends rather than drawing profits directly. There is no single income level at which incorporation automatically becomes more tax efficient. The right structure depends on your profits, personal income requirements, other income, how much you plan to retain, pension contributions, extraction strategy and the additional costs and responsibilities of running a company. The admin is also heavier. You will need to file annual accounts with Companies House as well as a corporation tax return with HMRC.
Bookkeeping Basics for Online Sellers
Good bookkeeping is not optional, it is the foundation of every other part of your finances. For e-commerce businesses, that means recording every sale, every refund, every platform fee, every purchase of stock and every business expense consistently and accurately.
What records do you need to keep?
- Sales records from each platform (Shopify, Amazon, Etsy, eBay, etc.)
- Receipts and invoices for stock purchases and business costs
- Bank statements for all business accounts
- PayPal, Stripe or other payment processor statements
- Records of refunds and chargebacks
- Import and export documentation if you source stock from abroad
HMRC requires you to keep records for at least five years after the 31 January filing deadline if you are a sole trader, and at least six years for limited companies. Keeping digital records from the start saves a significant amount of pain later.
Separate your business and personal finances
Open a dedicated business bank account as soon as possible. Mixing personal and business transactions makes reconciliation a nightmare and increases the risk of errors on your tax return. Most high-street and challenger banks offer business accounts with low monthly fees.
VAT and E-Commerce
VAT is one of the most complex areas for e-commerce sellers, particularly once you start selling internationally. Get this wrong and HMRC will come knocking.
When do you need to register for VAT?
You must register for VAT once your taxable turnover exceeds £90,000 in any rolling 12-month period (the 2026/27 threshold). You can also register voluntarily before that point, which may be worthwhile if your customers are mainly VAT-registered businesses that can reclaim the VAT you charge. Once registered, you will need to file VAT returns, usually quarterly, through HMRC’s Making Tax Digital system.
UK domestic sales
For sales to UK customers, you charge VAT at the standard rate of 20% on most goods. Some products, such as children’s clothing and food, are zero-rated or exempt, so always check the correct VAT treatment for what you sell before assuming 20% applies across the board.
Selling to customers in the EU
Since Brexit, selling goods to EU consumers has become more complicated. If your goods are shipped from the UK to EU customers, UK VAT does not apply. However, you may need to register for VAT in the relevant EU country, or use the EU’s Import One Stop Shop (IOSS) for parcels worth €150 or less, depending on the volume and destination of your sales. If you sell into Europe, take advice on your overseas VAT obligations before you start.
Selling through marketplaces
If you sell through a marketplace such as Amazon or eBay, the marketplace may be responsible for collecting and remitting VAT on certain transactions, particularly on sales of goods stored in UK fulfilment centres by overseas sellers. If you are a UK seller, you remain responsible for VAT on your own UK sales. Always check the VAT rules for each platform you use, as they differ.
Stock and Cost of Goods Sold
Stock is often the biggest asset on an e-commerce business’s balance sheet, and getting it right in your accounts matters both for accuracy and for calculating your true profit.
Cost of goods sold (COGS)
COGS is the direct cost of the products you sell, the price you paid for them, plus any import duties, shipping to your warehouse and similar costs. Deducting COGS from your revenue gives you gross profit. That is the figure you work from to understand how profitable your products actually are before you factor in overheads.
Valuing your stock
At the end of each accounting period, you need to value your unsold stock. The standard method under UK accounting rules is the lower of cost or net realisable value (NRV). In practice, that means you value stock at what you paid for it unless it is worth less than that, for example, if it is damaged or out of season. Overstating stock inflates your profit and leads to an incorrect tax bill.
Stock reconciliation
Run a regular stock reconciliation: at least monthly, ideally more often. This means comparing your physical stock count (or your system’s stock count) against your accounting records. Discrepancies can flag theft, damage, supplier errors or data entry mistakes before they become bigger problems.
Platform Fees and Payment Processor Charges
Amazon, Etsy, eBay, Shopify and payment processors like Stripe and PayPal all charge fees. These are genuine business costs and must be recorded properly, but the way they appear in your accounts can be confusing.
Many platforms pay you a net amount after deducting their fees. That means your bank receives less than the gross sale value. You should record the full gross sale as income and the fees as a separate expense. Recording only the net amount understates both your revenue and your costs, which can distort your gross margin figures and cause problems if HMRC ever reviews your records.
Payment processor fees are allowable business expenses for tax purposes, as are platform subscription fees, listing fees and fulfilment charges such as Amazon FBA fees.
Income Tax and Corporation Tax
How you pay tax depends on your business structure.
Sole traders
As a sole trader, you pay income tax and National Insurance on your profits through self assessment. In 2026/27, the personal allowance is £12,570, so the first £12,570 of profit is tax-free. Profits between £12,570 and £50,270 are taxed at 20%, profits between £50,270 and £125,140 at 40% and anything above £125,140 at 45%.
Class 4 National Insurance adds 6% on profits in the basic rate band and 2% above it.
Limited companies
A limited company pays corporation tax on its profits. In 2026/27, the small profits rate is 19% on profits under £50,000 and the main rate is 25% on profits over £250,000. Marginal relief applies on profits between £50,000 and £250,000. Directors typically take a low salary (often set at the employer NI threshold of £5,000 in 2026/27) and draw the rest as dividends. In 2026/27, the dividend allowance is just £500, so most dividend income is taxable, at 10.75% for basic rate taxpayers, 35.75% for higher rate and 39.35% for additional rate.
Allowable expenses
You can deduct a wide range of costs from your taxable profit. For e-commerce businesses, common allowable expenses include:
- Cost of goods sold and raw materials
- Packaging and postage
- Platform and marketplace fees
- Payment processing fees
- Website hosting and domain costs
- Software subscriptions (accounting, inventory management, email marketing)
- Advertising and marketing costs (Google Ads, social media ads)
- Warehousing and storage costs
- Home office costs (if you work from home)
- Professional fees such as accountancy
Accounting Software for E-Commerce
Manual spreadsheets quickly become unmanageable as order volumes grow. Accounting software that integrates with your sales platforms saves hours of manual data entry and reduces errors.
Xero is one of the most widely used cloud accounting platforms for UK small businesses and integrates with Shopify, Amazon, Etsy and most payment processors via apps such as A2X or Linnworks. QuickBooks is another solid option. Both are MTD-compatible for VAT.
If you are new to Xero, our bookkeeping service can set it up correctly from the start and avoid the costly mistakes that come from getting the chart of accounts or tax codes wrong early on.
Whatever software you choose, the key is connecting it directly to your sales platforms and bank accounts so that transactions flow in automatically. That gives you a real-time view of your numbers rather than a picture that is weeks out of date.
Cash Flow and Working Capital
Profitable e-commerce businesses can still run into serious trouble if their cash flow is poorly managed. Stock has to be paid for before it is sold. Marketplaces often hold funds for days or weeks after a sale. VAT collected must be paid to HMRC on a set date regardless of whether customers have paid you.
Watch your cash conversion cycle
The cash conversion cycle measures the time between paying for stock and receiving payment from customers. The shorter the cycle, the less working capital you need tied up in the business. If you are holding 90 days of stock and waiting 14 days for marketplace payouts, you need a significant cash buffer.
Plan for seasonal peaks
E-commerce businesses often have sharp seasonal peaks, Black Friday, Christmas, summer sales. Plan your stock purchases and cash requirements well in advance. A management accounts service can give you monthly profit and loss reports and a rolling cash flow forecast so you are never caught short.
Making Tax Digital and E-Commerce
HMRC’s Making Tax Digital programme is already live for VAT-registered businesses. Since 6 April 2026, MTD for Income Tax has applied to self-employed people and landlords with qualifying income over £50,000. That means quarterly digital updates to HMRC as well as a final tax return after the year end. The threshold falls to £30,000 from April 2027 and £20,000 from April 2028.
For e-commerce sellers with turnover above that threshold, the clock is already ticking. You will need MTD-compatible software and your bookkeeping will need to be current throughout the year, not just tidied up in January. If you are not yet using cloud accounting software, now is the time to make the switch.
NDCA works with many e-commerce businesses to get their systems MTD-ready ahead of the deadlines.
Getting Your Accounting Right from the Start
E-commerce moves fast. Margins can be tight, platforms change their fee structures and tax rules around overseas sales continue to evolve. Getting your accounting set up properly from the beginning, the right structure, the right software and the right processes, means you spend less time firefighting and more time growing your business. If you are unsure where to start, speaking to an accountant who understands e-commerce is the most efficient first step you can take.
Frequently Asked Questions
Do I need an accountant if I sell online?
You are not legally required to use an accountant, but most e-commerce sellers find it worthwhile, particularly as turnover grows, VAT comes into play or you move to a limited company structure. An accountant can also help you claim the allowable expenses you are entitled to and avoid costly mistakes on your tax return.
When do I need to register for VAT as an e-commerce seller?
Once your VAT-taxable sales pass £90,000 in any rolling 12 months. If you sell through an online marketplace, or you are based overseas and hold stock in the UK, different rules can apply, so take advice on your own position.
How do I account for Amazon or eBay fees?
Record the full gross sale value as income and the marketplace fees as a separate business expense. Recording only the payout hides part of your sales and costs and makes your margins harder to read.
What is the best accounting software for a UK e-commerce business?
Xero and QuickBooks are the most popular choices for UK small businesses. Both integrate with major e-commerce platforms and are MTD-compatible for VAT. Apps like A2X can automate the import of marketplace settlement data into your accounting software, saving significant time.
Do I pay tax on every sale I make online?
You pay tax on your profit, not your gross sales. As a sole trader, profits are taxed through self assessment. As a limited company, the company pays tax on its profits and you pay income tax on what you draw as salary and dividends. Allowable expenses, including stock costs, platform fees and postage, are deducted before calculating your taxable profit.
What records do I need to keep as an online seller?
You need to keep records of all income, expenses, bank statements, purchase invoices, platform payout reports and stock valuations. The minimum periods are five years after the filing deadline for sole traders and six years for limited companies. Digital records are strongly recommended and will be mandatory under MTD.
