If you buy materials to create products, purchase stock for resale, or incur direct costs delivering your service, these are claimable as 'cost of goods.' This is especially important for makers, craftspeople, retailers, and anyone who sells physical products.
What Counts as Stock & Materials?
- Raw materials: Wood, fabric, metal, ingredients, paint, chemicals — whatever you use to make your products.
- Stock for resale: Products you purchase from wholesalers or manufacturers to sell to customers.
- Direct project costs: Stock photography, fonts, design assets, printing for client projects — anything bought specifically for a job.
- Packaging materials: Boxes, tissue paper, branded packaging for your products.
- Samples: Product samples sent to potential clients or for testing.
Stock Valuation and Accounting
If you use cash basis accounting (the default for most small businesses), you claim the cost of stock when you pay for it, regardless of when you sell it. This is simpler and means no year-end stocktake.
If you use accruals accounting, you need to do a stocktake at the end of your financial year. Only the cost of stock that was actually sold during the year is claimed as an expense; unsold stock is carried forward.
Important: If you take stock for personal use, you must account for it at market value as income. You can't take products from your business for free without tax consequences.
Example: Stock & Materials for a Handmade Jewellery Business
| Expense | Amount |
|---|---|
| Silver and gemstones | £2,400 |
| Packaging and gift boxes | £300 |
| Stock photography for website | £80 |
| Tools and small equipment | £200 |
| Total claimable stock & materials | £2,980 |
At the 20% basic rate, this saves £596 in income tax.