When can I deduct China stock payments?
Once trading has started, cash basis generally deducts allowable stock payments when paid, including a deposit towards the price before delivery. Claim only paid amounts, handle VAT consistently and record later refunds when received. Cambridge China Bridge can help gather the supplier paperwork.
Confirm that trading has started
This guide concerns a sole trader already trading and calculating profits using cash basis. HMRC allows the amount paid for goods bought for resale. If your first China order was paid before trading began, ask your accountant to establish the commencement date and review the opening-stock treatment before claiming.
Our pre-trading sample guide explains why evaluation samples and resale stock need separate treatment. Ask HMRC or your accountant to confirm how advance purchases of resale stock should be treated and whether that sample-related pre-trading relief applies; do not put the whole factory order into a sample-expense category.
Deduct the paid deposit, not the unpaid order
HMRC says to count only expenses actually paid. Applied to an allowable resale-stock purchase, a deposit that pays part of the purchase price is generally deductible when paid, even while the goods remain at the factory. The unpaid balance waits until payment. Delivery or sale later does not itself defer the deduction for the qualifying amount already paid.
Ask the supplier to show how the deposit reduces the balance. If money is held as security, remains in an intermediary account or can be returned without a purchase, give the terms to your accountant rather than assuming it is a stock expense. Our supplier payment guide covers the purchasing checks.
Record freight and duty as separate payments
Apply the same payment rule to allowable freight, insurance, clearance and import-duty costs for the trading order: deduct the qualifying amounts actually paid, rather than a forwarder’s estimate or an unpaid customs bill. Give your accountant the invoices and duty records to confirm classification.
Build an order ledger showing each payee, payment date, purpose and supporting document. Reconcile any forwarder advance against the final charges and returned balance. Our unsold-stock valuation guide covers accounting valuation; keep that exercise separate from deciding when cash-basis payments enter the tax calculation.
Keep VAT treatment consistent
For VAT-registered cash-basis businesses, HMRC requires income and expenses to use the same VAT treatment. Where records include VAT, net VAT payments to HMRC are expenses and net repayments from HMRC are receipts. Agree the bookkeeping method with your accountant before recording the order.
If you are not VAT registered, ask HMRC or your accountant to confirm how import VAT should be treated as a cost. If you are registered, identify recoverable import VAT separately for review. Ask HMRC or your customs broker to confirm whether you can use postponed VAT accounting to account for import VAT on the VAT return instead of paying it at the border. Our import VAT guide explains that process. Keep postponed amounts distinct from cash paid to a supplier or forwarder.
Record refunds and preserve the payment trail
A supplier refund of a stock cost deducted under cash basis must be reflected when received. Record it against the original order as a business receipt, including when it arrives in a later tax year. A promised refund is not received income. Ask your accountant to review credits applied to another order separately from cash returned.
Keep the original payment, refund confirmation and bank receipt together; do not erase the purchase history. Supply the accountant with the order, invoices, payment evidence, freight reconciliation and VAT records. Cambridge China Bridge’s staff in China can help obtain supplier statements showing deposits, balances and refunds.
Frequently asked questions
Can I deduct a China stock deposit before delivery?
Generally yes, once trading has started, if it is an actual payment towards an allowable resale-stock purchase. Ask your accountant to review security deposits or money still held by an intermediary.
Can I claim the whole order after paying the deposit?
No. Under cash basis, count only the qualifying amount actually paid. Deduct the unpaid balance when you pay it, rather than when the supplier issues the invoice.
Can I deduct freight, duty and import VAT?
Allowable freight and duty follow the payment rule. If you are not VAT registered, ask HMRC or your accountant to confirm how import VAT should be treated as a cost. Registered businesses need consistent VAT bookkeeping and separate review of recoverable or postponed import VAT.
What if the factory refunds my deposit next tax year?
If the deposit was deducted as a trading expense, reflect the refund when received in the later year. Keep the original deduction and refund linked. A promised refund is not yet received income.