10% Wastage on all raw materials purchases for a small craft business. Is this correct?

10% Wastage on all raw materials purchases for...

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As stated in the question I have a new client for whom I am preparing there SATR for 2013-14. It is a small craft business that has been operating for several years. So far the accounts have been compiled on a cash basis and they allowed for wastages by adding 10% to the cost of purchasing raw materials. They inform me that they were advised by HMRC to do this and it would seem a sensible approach, if a little simple, but I am not sure that HMRC would see it this way.

Being Monday I am struggling to find anything sensible on HMRC website on the matter. I would be grateful for any views or a point in the right direction on HMRC's website.

Replies (17)

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the sea otter
By memyself-eye
17th Nov 2014 15:23

Adding 10%?

Why on earth would that make sense. Wastage is a function of the cost of purchases not an addition. If the client only has economic use of 90% of what he buys then there is no need for 'additions'.

 

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By buttinski
17th Nov 2014 15:26

The cost

is the cost!

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By mrme89
17th Nov 2014 15:28

Imaginary 10% increase in cost for 'tax planning'?

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By Richie Rich
17th Nov 2014 15:41

Thanks. I am not sure that giving blood on a Monday morning has done me any favours!!!

I guess what I was just checking to see if there were any dispensations (that I was not aware of) for this type of business, akin to wear and tear for childminders calculated at 10% of Sales, but logically thinking there won't be.

Thank you for your patience!

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By johngroganjga
17th Nov 2014 19:08

What is the double entry for the 10% uplift to purchases? If somewhere else in the P&L for the same year then no harm has been done except for the waste of time making pointless entries. Otherwise client has been defrauding HMRC for years, and let's just hope they can produce the advice in writing.

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By User deleted
17th Nov 2014 20:19

Double entry

johngroganjga wrote:
What is the double entry for the 10% uplift to purchases?

Dr Wastage
Cr HMRC!!!!!!!!

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By SKCOX
17th Nov 2014 20:06

Heard this one before

from a client who bakes biscuits and sells them at market, so I suspect someone is propagating this tale. Every year I have to explain that we reclaim the full cost of materials used, so wastage is irrelevant.

 

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By ShirleyM
17th Nov 2014 20:29

I've had clients query the 10% wastage

I explain that many trades add 10% to the materials ordered to allow for wastage, which is, in effect, adding 10% to the cost.

The last query was from a greengrocer, who somehow thought he could charge the wastage to the P&L, in addition to the purchase costs.

Sometimes it is like wading through treacle trying to get them to understand. I suspect some clients don't want to understand. They just want you to agree to increase purchases by 10%.

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By Richie Rich
17th Nov 2014 20:41

Again thanks for the comments. I feel suitably embarrassed for asking the question. Should have worked out the double entry before posting! Mental block Monday!

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By Ken Howard
18th Nov 2014 08:03

May not be such a wrong idea after all?

A wastage charge could still be appropriate depending on how the book-keeping is done.

I've had clients who've charged their purchases to the stock (BS) nominal code and do a journal for the cost of goods sold (dr COGS cr stock) which they calculate from their own workings/knowledge of what goes into the product sold.  If they do it that way, then the stock (BS) balance is always a balancing figure and would be inflated if wastage wasn't accounted for by another journal.  One client who did this was an OAP who made jewellery and must have spent more time on her book-keeping that jewellery making as she had horrendously complicated back-up workings to show the costs of everything she made - all that for sales of just a few thousand per year!  (But she was a maths/statistics graduate!!).

Sometimes, clients, especially small cases, just don't "get" simple book-keeping based on money in and money out.  They seem to have some kind of perverse need to go into weird and wonderful detail.  Another client showed stationery and postage costs based on letters sent and reports written, per sheet, and didn't keep any receipts or records showing her real stationery and postage costs.

It's the same kind of logic where overheads are posted to prepayments codes, i.e. insurance, rates, road tax, etc., and then a journal is done to release the usage back to the P&L account.

I really doubt that's the case here, but it may help explain why some people clearly think that an allowance such as 10% is acceptable, if they don't actually think the monies they spend is the figure to be used in the P&L (plenty don't for some weird reason).

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Replying to Constantly Confused:
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By buttinski
18th Nov 2014 10:31

Good logic

Ken Howard wrote:

It's the same kind of logic where overheads are posted to prepayments codes, i.e. insurance, rates, road tax, etc., and then a journal is done to release the usage back to the P&L account.

There is good logic and bad logic. The above is how all large companies I have come across deal with major items otherwise monthly profits fluctuate due to the timing of annual transactions - rates and insurances, for example.

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By johngroganjga
18th Nov 2014 10:39

Accounting for prepaid expenses is perfectly logical - and of course correct.

Making one sided entries to inflate purchases, for a cost that is already included in purchases, just to defraud HMRC, is neither logical not correct.

I am at  a loss to understand how someone can say that the same logic underlies both.

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Euan's picture
By Euan MacLennan
18th Nov 2014 11:02

Isn't this very simple?

It is not so much wastage of purchases, but of stock.  The result of wastage is a lower closing stock of materials.  The double entry is as usual for closing stock - DR Balance Sheet CR P&L Cost of sales.

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Replying to Rgab1947:
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By buttinski
18th Nov 2014 11:09

Yes

It is!

They can work out the wastage (if they want) and show it as a component of cost of sales but that is a different matter.

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By johngroganjga
18th Nov 2014 11:07

Yes it couldn't be simpler.

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James Reeves
By James Reeves
18th Nov 2014 11:07

Wastage

I have just read this whole thread and have now decided that most of that time was wasted. As I am not able to bill anybody for that wasted time am I allowed to claim it as a deduction against income on my tax return? Which box should it go in? Also, if I deduct it, will HMRC send me a cheque right away or will I have to wait until January? I asked my accountant and he said I can't claim for wasting my own time but my mate gets his accountant to put all his wasted time through his tax computation and gets a massive tax refund. His accountant was even able to claim back some of the wasted time and so now my mate gets an extra 2 days off each month.

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By Manchester_man
18th Nov 2014 17:41

The only time wastage percent is needed is when a client is under enquiry and the Revenue are trying to uplift purchases in an attempt to arrive at a value for turnover. Arguing a higher wastage value can sometimes knock the inspector's figures into place.

As has been said already, some clients seem to think that wastage is incorporated into the accounts, but they are wrong.

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