I have an artist friend who has a business taking painting 'classes' for want of a better word in various locations in the UK and (mostly) abroad.
From time to time, there are expenses going through the bank that are described as 'research trip' in order to find locations for future trips. Sometimes, these searches are tagged on to the end of an actual organised trip to explore other locations in/near a location already used and sometimes it is a 'stand alone' trip which may be for a week or so.
I notice that these expenses have always been collected and included along with all actual trip expenses as allowable cost of sales in previous years accounts. I am now wondering if this is correct?? Should research trips be treated as prepayments until the time where a trip is organised for this location?? If the research trip is not fruitful, should it be included in the cost of sales in the current period??????......or perhaps not allowable at all if HMRC sees this as just a jolly!!??
There is also VAT to consider, so the inclusion/exclusion of these costs in the margin makes a difference!!
Of course, some of these research trips can include some work that will lead to other non trip sales like paintings/prints which is a consideration??
What type of business does he/she have ? Is he/she a sole trader ?
I have no experience of having painters as clients but I would still be asking a few questions of these "research" trips before I allowed them as expenses in the accounts, as in
Does he/she go on these trips alone?
How long do the trips last for?
How often do these trips occur?
How many of these trips are actually turned into profitable ventures ?
__________________
Doug
These are only my opinions of how I see things and therefore should not be taken as advice
She was a sole trader but has incorporated in the last couple of years.....still a one woman/one director business.
There are usually between three and five of these research trips - or extended classes - per year and I would say that a couple per year will result in profitable future ventures. It would normally take a couple of years for these to be set up and offered to customers.
The artist will always be alone and they can last for two/three days to around a week depending on where and how far away/how wide ranging the area being researched.
As mentioned though, there is probably other income generated from these trips from day one (paintings/prints) - as well as non-income generating stuff like her blog....although this will perhaps lead to take up of the foreign classes???? The painting/print sales alone wouldn't justify the level of expenses incurred on the research trip though!
I think in the past the core business (art trips) has been considered one merry-go-round of organising/taking trips and researching trips which has kind of blurred. So the thought of adjusting for pre-payments hasn't occurred.
Are you the accountant/bookkeeper for this lady or are you just looking to advise her as a friend?
Please don't take this as advice as I do not know enough about the situation and can only offer an opinion as to how I see things from what you have described
It seems to me that the actual trips that turn into future business are quite low (3-5 trips per year converted into maybe 2 foreign classes) in this day and age could the majority of the research not be done online?
If the client can produce all the relevant receipts to prove that all of these expenses are business related in light of a HMRC investigation then fine, but there could also be a lot of people who are thinking lets go on holiday and I will just say that I am doing research for a future business trip (call me sceptical if you like).
As for prepayments I don't really see that if these expenses are allowable that they could be accounted for as a prepayment, a prepayment is an expense paid in advance which has not yet been incurred, in the situation you are talking about the expense has already occurred on the possibility that future profits will be made, I have met potential clients and paid travelling expenses to meet them and I include them in the accounting period that these expenses incurred not as a prepayment for when I do work for this client as this may never happen, but it is still a legitimate business expense.
Cheers
__________________
Doug
These are only my opinions of how I see things and therefore should not be taken as advice
