Cost of sales: what you can claim

Cost of sales is what you spend on the things you actually sell — stock, materials and subcontracted labour. For shops, builders and makers it is usually the biggest expense category, so getting the numbers right directly affects the profit your quarterly updates show HMRC.

What you can claim

• Goods bought for resale — stock you buy in and sell on, from a shop's shelves to a plumber's boilers and fittings.
• Raw materials — timber, fabric, ingredients or components used to make what you sell.
• Subcontracted labour — payments to people who directly help deliver the job, such as a bricklayer on a building project.
• Delivery costs on purchases — carriage or postage you pay to get stock to you in the first place.
• Packaging — boxes, bags, padded mailers and wrapping used to send orders out.
• Import duty and customs charges — on goods brought in for resale.
• Production consumables — sandpaper, blades, ink and other items used up while making things.
• Stock adjustments — at year end, unsold stock is counted and deducted, so you only claim what you sold or used.

What you can't claim

• Your own time — as a sole trader you take drawings from profit rather than a wage, so your own labour is never an expense.
• Equipment you keep — a new chop saw or laptop is capital expenditure, not cost of sales.
• General running costs — phone, insurance and advertising each have their own category.
• Stock taken for yourself or your family — that's drawings, and it must be added back out of your purchases.

Common mistakes

The classic error is claiming everything you bought rather than everything you sold. If you buy £3,000 of materials in a quarter but only use £2,200 on jobs, claiming the full £3,000 overstates your costs. A stock count at the end of your accounting year puts this right, so keep a rough note of what's on the shelf.

A related problem is small purchases drifting into "other operating expenses" because it feels easier. A weekly stock run to the builders' merchant belongs here — parking it elsewhere hides your true margins and makes your category totals harder to reconcile at year end.

Finally, watch stock you take for personal use. Carrying a tin of paint or a roll of tape home from the van is drawings, not a business cost, so note it and remove it before your quarterly totals are sent.

How to record it in your MTD tracker

Select Cost of sales for anything bought to resell, made into something you sell, or consumed in production, and note the supplier and what it was for. Subcontractor payments belong here when they are tied directly to jobs — if you're in the Construction Industry Scheme, keep HMRC's monthly statements as evidence.