TSCB 11: Complicated Stock Situations Part 1

If you’ve been reading the UK Tax for Small Crafting Business articles as a series, you’ll have noticed that we’ve become a little hung up on issues around Stock. That’s because it’s not the easiest concept to handle, especially not in the context of small crafting businesses who might carry a lot of raw materials and finished items which don’t perish or deteriorate or even go out of fashion: when you take that scenario together with a slow sales rate, you have to pay more attention to the rules on stock than you really want to!

So far, the articles in this series have set out the theory behind how cost of sales (raw materials & finished items which is called stock) and overheads (all the other expenses) are treated for tax, and applied it to the simple example of Alice the fudgemaker’s new business. It really is a good idea to go back and read the earlier articles because each one builds on what’s gone before, and whilst you can read them in isolation, I think the wider issues will be a lot clearer if you read back. In particular this article builds on the basic concepts explained in TSCB 6 and further discussed in TSCB 8, TSCB 9 & TSCB 10 (go to the Tax tab at the top of the Blog for an Index).

Fortune has smiled on Alice and she’s picked a business where her raw materials and product are perishable and relatively quick to make so that she in effect ‘creates to order’. As a result her stock & other expenses position is relatively simple – at the end of her trading year, the most she’s likely to have is the remnants of her latest batch of perishable raw ingredients and what’s left of her latest batch of fudge as yet unsold.

But what about the rest of us? How do we deal with the rules on tax relief for stock expenses when we carry a lot of raw materials or finished stock, or even, have raw materials acquired long before the idea of selling entered our heads?

Featured seller: CLSCraftCreations (Chiara): See her Etsy shop here and more about her work at the foot of the page

TSCB 10: Those rules apply to me? How? Part 2: Cost of Sales & Stock Expenses

This article follows on from the example of Alice the fudgemaker in TSCB 7 here. I was originally intending this article to be published before the 31 January 2011 deadline for tax returns, but real life got in the way. So, for the purposes of this article, we’re still pretending it’s before the deadline (even though it isn’t)!

As a result of TSCB 6 on Stock Work in Progress & Appropriations here which caused a bit of consternation: I wrote TSCB 8 & 9 to clarify the issues. TSCB 8 was about how to distinguish between stock expenses (raw materials or products bought in for resale otherwise called Cost of Sales) and other expenses (called Overheads) here and TSCB 9 was an explanation of a variety of different methods of stock valuation (essentially what you can & can’t do) here. You might find it useful to read these earlier articles before moving onto this one (I did!) but you should also be able to make reasonable sense of it even if you don’t go back –use the new Tax articles Index tab here to find them.

When we last encountered Alice she’d got most of her paperwork sorted, and had separated out her stock expenses receipts, but she hadn’t done anything with them. And she’d decided to follow the HMRC method of working out what stock expense she could claim tax relief on (see Helpsheet 222 on HMRC website here).

Featured Seller: ElliesTreasures find her on Folksy here and more about her work at the foot of the article

TSCB 9: How to value Stock, and how not to!

Again I'm taking a step back and going into a bit more of the background behind the tax rules: back to the fact that 'tax treatment follows accounting treatment.  Normally.  But as ever there's exceptions and the valuation of stock sometimes falls into an exception. 

A business which prepares full Annual Accounts (much larger businesses than the ones I'm concentrating on here), might value their stock in particular ways which are acceptable in the Accounts, but of which HMRC doesn't approve, and therefore have to adjust their figures for their tax return.  However, I'm dealing with small businesses here who don't usually draw up a Profit & Loss and Balance Sheet and Notes explaining their accounting policies, so this post is going to be all about how to value your Stock in ways that HMRC accept are within the current tax law, and which methods aren't acceptable to HMRC.

I think it's worth noting that this is an area that is, how do I put it, slightly more fluid than HMRC would like.  However, as with the rest of this series, I am sticking to the HMRC line because that's less likely to get you into trouble, unless there's a seriously viable alternative that the various accounting & tax institutes themselves are fighting for (and winning on) - if that applies I'll flag it up very clearly that it's a potential, but risky approach and not favoured by HMRC to be considered at your own risk.  Just so you know, this article doesn't have any of those alternative type approaches in it.

Featured Seller: KnittedLove find her on etsy here and more about her work at the foot of the article

TSCB 8: What's the difference between a 'stock' expense and any other?

From the feedback, it's obvious that I jumped ahead of some knowledge that's needed to make sense of the tax rules - apologies. 

I was asked the question - well I hope this was the question - why is stock treated differently from other expenses and what makes an expense a 'stock' expense?

Featured Seller: KatieDidOnline: See her Etsy shop here  and about her work at the foot of the article

TSCB 7: Those rules apply to me? How? Summary of Expenses so far

As we’ve now reached a grand total of 7 articles in the Tax for Small Craft Business Series, and quite a few people are showing a bit of bewilderment, there’s a couple of points I think I need to emphasise, and also examples to share about how the rules can be very simple really. No, honestly they can, although perhaps not so much for craft businesses because of the stock valuation issues.

This post follows the steps a brand new small crafting business (a made up person called Alice’s made up new venture making & selling fudge) takes to get her first year’s figures into their Tax Return, based on the issues about trading periods and the sorts of expenses we’ve covered so far – so it’s not complete by any means, but should give you a bit of help to understand how what we’ve covered operates in real life.

The example ended up quite long, so it’s in two parts:

• Today’s post covers how to deal with all the ‘normal running costs’ expenses – that is anything that’s not ‘stock’.
• The second part (available on Wednesday) will cover the ‘stock’ expense and a bit more on stock valuation, and getting the figures into the Tax Return itself.



Featured Seller: BrightStar 109 (Claire English) See her Etsy shop here

and about her work at the foot of this article

TSCB Stop Press: News about what's coming next

Firstly, well done for making it this far!  The first 7 articles have been quite technical and very very long - I hope you've found them useful even if you've not quite worked out how the ideas discussed apply to your small craft business.  Or, you might have worked out how they might apply and are horrified and hoping I'm wrong!!  If so, sorry about that, but all I can do is tell you how it should be done, it's up to you to apply the rules sensibly to your own position.

Because tax and accounting for small businesses can be very complicated as it's based on rules for big business, and because I'm human and sometimes have to double check what I've written about because someone queries what I've said, I'm adding a couple more specific types of article to this series:

Featured Seller: The Cycling Artist (Tina)  Find her shop at Etsy here

and about her work (and guest blogging to come) at the bottom

TSCB 6: Expenses - Stock, Work in Progress & Appropriations

As a crafting business you often are both manufacturer and retailer. Stock control is important so you know what you’ve got on hand to sell, but it also matters for working out your expenses for tax. You need to know what you started with, what you used, what you’ve sold and what you’ve got left.

To be absolutely clear, you can only claim the underlying expenses relating to the products you have actually sold (or have left your ownership) in the Trading Period – all the other expenses for raw materials/ supplies etc that you’ve bought aren’t eligible for tax relief until those materials or supplies have been sold. They just sit in your stockpile until they are ‘used up’.

So, if you have been claiming expenses for raw materials or supplies purchased during the Trading Period that you haven’t actually used to make something that has actually been sold or otherwise taken out of your ownership during the Trading Period– technically you’ve been doing it wrong because that’s the ‘cash basis’ and you should be using the Accruals Basis (see the last post about Cash & Accruals Basis). To regularise your position you will have to make an adjustment to add back the expenses you have overclaimed in earlier years, based on what stock you have on hand on the first day of your new Trading Period. You really also ought to tell HMRC, which could lead to a revised and higher tax liability for earlier years (or reduced losses), penalties and penalty interest.

Featured Seller: Poppy Sparkles (Viv Smith) See her Etsy shop here

and about her work at the foot of this article

TSCB 5: When and how to claim Expenses

The last post covered the basic technical principles behind what type of expenses are claimable and why they might be disallowed for tax purposes. This article covers how to work out when you can claim a (revenue) expense, & how much detail you need to give HMRC about your expenses in your tax return.

To work out your business income & expenses you can’t just look at the actual cash position – the money you received and the money you paid out (‘cash basis’ in accounting speak). You also have to look at money that is owed to you, or you owe others at the end of each Trading Period at your business’ year end (‘Accruals Basis’ in accounting speak).

Some expenses examples of this would be if

• you’ve ordered and received some raw materials but not paid for them yet (you need to make an Accrual adjustment), or
• where you’ve paid for something you haven’t had yet, like the line rental on your home telephone (you need to make a PrePayment adjustment).

This article explains what happens to those sort of expenses that are hanging over from one year to the next.

Featured Seller: SoapDragon (Amanda): See her Etsy shop here

and about her work at the foot of this article

TSCB 4: Claiming Expenses - the Basics

The subject of expenses is quite large so I’ll be splitting it over several articles. This article will deal with the basic principles, subsequent articles will deal with specific expenses - when you can claim them and when you can't.

I think the most important thing to understand it that whilst a business’ right to claim expenses is enshrined in the legislation, there isn’t actually a proper list of what you can claim – there’s a limited list of what you can’t claim, and then there’s exceptions to that list (that you can claim after all – yes, welcome to the weird world of UK tax), but even those aren’t the full story. Which isn’t very helpful to new or small business owners who can’t afford help or don’t know where to look for answers to their questions.

Featured Seller: NiftyKnits (Heather): See her Etsy shop here

and about her work at the foot of this article