Cost of Sales

[d000hg]

I thought all IT geeks were proficient in matrix algebra...

Now we're just off on a tangent.

[Contreras]

Thanks. I gather that there's no official guidance (e.g. accountancy standards) on when particular expenses are/aren't Cost of Sales. If everything is lumped in as an overhead then gross profit margin will be 100% regardless of circumstances. In the end, if there are no rules, then who cares? It doesn't affect tax owed.

There's a useful thread over on AccountingWeb (registration needed), the view there being that a hairdresser's salary was not an overhead. Quote:

This is a common question I find - and I always say that, if the function of the individuals is to generate income by selling their time/expertise then it's cost of sales.

Anyone who does not contrbibute directly to sales is an overhead.

Is contracting via a 'PSC' any different? I imagine that most contractors spend most of their time in direct fee-earning capacity, unless you include time spent on CUK . Many will draw a salary when on the bench though.

Pension - in my case at least (but I suspect other's too), is a sales related commission not a fixed cost. Paid as a bonus only when dividends are adequately covered. As I understand it, that's clearly CoS.

Travel expenses - the vast majority of which would be mileage, accommodation & subsistence whilst engaged on a contract - these costs would either be directly recharged to the client or factored in the rate. Either way I cannot see how these are overheads.

[TheCyclingProgrammer]

Ultimately, I'd say the most important part of your post was the first bit - it's probably not that important and I would go with whatever your accountant's preference is.

Expenses - I'd consider these overheads as the costs aren't normally directly incurred by YourCo but by you personally. The cost to YourCo is simply reimbursing them so I'd think of it no differently to salary.

I wouldn't personally consider salary cost of sales as presumably you aren't paid a salary for a specific gig and would probably continue taking a salary when out of contract.

As I said in my first post it certainly seems to be very subjective and a matter of preference/style for accountants so I wouldn't worry about it unless you think there is a gods reason to?

[Maslins]

Our opinion is that the expenses would be recorded as administration expenses (although I am unsure about the third one, I assume this is employers NI).

Cost of sales are costs directly related to the sale, for example manufacturing costs, attributable labour costs and allocated overhead costs. They are typically seen in manufacturing companies and retailers etc.

I'd agree with this. Firstly like the OP says it's fairly arbitrary anyway (no tax impact on whether a valid expense is a "cost of sale" or "admin expense"). For contractor companies, there typically aren't really any cost of sales. Possibly you could argue travel was, assuming it's travel to client sites, rather than travel to visit your accountant/similar. I wouldn't worry about it, it makes naff all difference!