The first article in this series looked at how travel expenses work for tax purposes but there will undoubtedly be many other costs in a business that will need to be factored in, this article looks at types of costs and what they mean.
Generally business expenses fall under two categories, direct costs and overheads and the split is important because understanding whether a cost is directly related to the quantity of product or service you sell can drastically improve your business planning.
Labour – These are costs like staff or contractors you use that have flexible working conditions so that you only have to pay them when there is work to do but if your business is large enough then it could also include permanent staff that work solely on providing a service to your customers.
Purchases – This category includes any materials and services that you need to provide the service to the clients and the cost is directly related to your sales volumes.
Stock – This often catches small business owners out as it’s not always the simple case of buying it and then claiming it as an expense in the same year, quite often it’s necessary to keep track of a business’s stock levels so that the accounts only reflect the value of the stock sold and not purchased.
It can represent a risk to a business as it can go missing or get damaged, become obsolete if not sold fast enough and also if there is too much of it then it’s cash that’s being tied up which could be spent on growing the business or when there’s too little it can lead to disappointed customers and lower profits.
Successful business owners will seek to get systems in place so that they can closely monitor and plan stock levels.
Overheads are generally costs of a business that aren’t directly related to the product or service that is being supplied and as a result would need to be paid for regardless of how much product is sold.
This often includes things like office staff and office running costs, insurances, travel, advertising, training, legal fees and most importantly accountancy fees 😉
Even when times are good it’s important to be aware of the risk in you overhead structure and have a contingency plan to reduce it in case business does quieten down, this could include having other suppliers you could buy from or even ensuring that you have enough staff on flexible hours in case you don’t have work for them.
Legally receipts are only required relating to expenses when you are VAT registered, this means that if you aren’t VAT registered and you paid out for something but have lost the receipt you can still claim for it as long as you have some other form of evidence that you bought it.
R&D Tax Credits
If you’re a limited company and spending money on research and development than there are some really good incentives available, many small businesses undertake R&D without realising it so talk to an accountant.
Start up Costs
You can also claim for any expenses you had relating to your business before you officially started it, this can often include costs like researching the industry and registering domain names online, as well as any equipment you previously bought that you now use in the business.
Not all expenses can be claimed for straightaway and some need to be spread out over several years if they are considered to be an asset, the tax treatment of these varies depending on what it is and the government incentives available.
Thanks for taking part in our online course, Northants Accounting is based in Northampton and we act as the accountants for a range of small businesses both locally and spread out over the country, if you would like to find out a bit more about how we could help your business then please get in touch.