Most online sellers with limited companies underestimate how much their stock valuation affects their tax bill. Get it right and you pay tax on real profits. Get it wrong and you could be paying tax on inventory that has not yet sold, or worse, claiming losses that HMRC would dispute.
Here is how UK online sellers should value stock at year-end, and why getting this right matters more than you might think.
Why stock valuation matters for tax
Your taxable profit is calculated as: sales minus cost of goods sold minus other expenses. Cost of goods sold is itself: opening stock plus purchases minus closing stock. So the value you put on closing stock at year-end directly affects how much profit you declare and how much tax you pay.
Underestimate closing stock and you understate profit (HMRC will not accept this). Overestimate closing stock and you pay more tax than you owe. The aim is accuracy, not optimisation.
What stock includes for tax purposes
For an online seller, “stock” includes:
- Items you have purchased for resale that are still unsold
- Raw materials waiting to be made into products (Etsy makers, this means your supplies)
- Work in progress (partially finished items)
- Stock held at FBA warehouses or third-party prep centres
- Stock in transit that you legally own
It does not include personal items, equipment, or anything you intend to keep rather than sell.
How to value stock: lower of cost or net realisable value
UK accounting rules require stock to be valued at the lower of cost or net realisable value (NRV). In practice:
- Cost includes the purchase price plus any costs to bring the item to its location and condition (shipping, import duty, prep fees)
- Net realisable value is the price you expect to sell it for, minus any costs to complete and sell (listing fees, postage, packaging)
For most sellers, cost is lower than NRV (you would not be selling at a loss on purpose), so cost is what you use. But if you have damaged stock, slow movers, or items you have marked down significantly, NRV may be lower and that is what you use.
FIFO vs Weighted Average Cost
When you buy the same product at different prices over time, you need a method to decide which units to value at year-end. Two common approaches:
FIFO (First In, First Out)
Assumes the oldest units are sold first, so closing stock is valued at the most recent purchase prices. Generally results in higher closing stock values when prices are rising, leading to higher reported profits.
Weighted Average Cost
Calculates an average cost across all units purchased and uses that for everything. Smoother profit reporting, simpler if your prices fluctuate often.
LIFO (Last In, First Out) is not allowed under UK accounting standards, so do not use it.
Pick a method and stick with it. Switching methods year to year is something HMRC notices and may question.
Practical stock counting at year-end
Whatever method you use, you need an actual count of physical stock at the end of your accounting year. This is especially important for Amazon FBA sellers and Whatnot sellers who often hold significant inventory off-site:
- Counting stock in your home, garage, or warehouse
- Pulling FBA inventory reports from Amazon as at year-end date
- Getting reports from any prep centre or 3PL holding stock for you
- Documenting in-transit stock you have paid for but not received
Keep the stock count as evidence. HMRC can ask for it during an enquiry, and “I just estimated” is not a valid answer.
Common stock valuation mistakes
- Forgetting to include FBA stock in inventory totals
- Valuing stock at retail price rather than cost
- Not adjusting for damaged or unsellable items
- Including shipping costs to customers as part of cost (this is an expense, not stock cost)
- Switching valuation methods year-to-year
When you have a problem: writing off stock
If you have stock that genuinely cannot be sold (damaged beyond repair, expired, completely unfashionable), you can write it off and claim it as an expense. But you need evidence:
- Photos of damaged goods
- Records of attempted sales at reduced prices
- Disposal records (charity donation receipts, recycling certificates)
“I think I will not be able to sell it” is not enough. HMRC expects evidence of actual unsaleability.
How specialist accountants help
At Simplr Accounting, we work with online sellers across Amazon, Etsy, Whatnot, and beyond. We help you set up systems to track stock cost properly throughout the year (not just frantically at year-end), pick the right valuation method for your business, and make sure your year-end position holds up to HMRC scrutiny.
If you want to stop guessing about your stock value and start getting it right, book a free discovery call.