What Is Cost of Goods Sold (COGS)? A Guide for UK Sole Traders
Deduct what you sold, not what you bought. The distinction is the difference between an accurate profit figure and an HMRC enquiry.
- What Is Cost of Goods Sold (COGS)? A Guide for UK Sole Traders
- Cost of goods sold (COGS) is the direct cost of the stock you actually sold in a period - what you paid to buy or make those specific items. Stock you bought but have not sold yet is not COGS; it is closing stock, carried forward to the period it eventually sells in.
Buy £40,000 of stock, sell £25,000 of it, and it is tempting to put £40,000 in the expenses box. It is also wrong, and it is one of the errors HMRC looks for hardest in a product business. Cost of goods sold is the cost of what you sold, not what you bought, and the gap between the two is your closing stock.
- COGS is the direct cost of the items you actually sold in the period.
- The formula is opening stock + purchases - closing stock.
- Unsold stock is carried forward, not expensed, under accruals accounting.
- Overheads like rent, software and advertising are not COGS - they are separate expenses.
- Turnover minus COGS gives gross profit, the number that tells you whether your pricing works.
The Formula
- Cost of goods sold
- Opening stock + purchases during the period - closing stock. The result is the direct cost of the goods that actually left the business as sales.
Three numbers, and only one of them takes real effort:
- Opening stock - the value of unsold stock you carried in from last period. For your first year it is zero.
- Purchases - everything you bought for resale or as raw materials during the period, at cost.
- Closing stock - the value of what is still unsold on your accounting date, at cost (or lower, if it will not sell for what you paid).
Closing stock is the one that requires a count. Everything else falls out of your bank feed.
A Worked Example (2026/27)
Priya sells kitchenware online. In 2026/27 she:
- carried in £5,000 of stock from the previous year
- bought £40,000 of new stock during the year
- counted £15,000 of unsold stock at her 5 April 2027 year end
- took £62,000 in sales
| Line | Amount |
|---|---|
| Turnover | £62,000 |
| Opening stock | £5,000 |
| Purchases | £40,000 |
| Less closing stock | (£15,000) |
| Cost of goods sold | £30,000 |
| Gross profit | £32,000 |
Priya deducts £30,000, not the £40,000 she spent. The £15,000 of unsold stock is not lost - it becomes next year's opening stock and reduces next year's profit when it sells. Claiming the full £40,000 would understate this year's profit by £15,000 and overstate next year's by the same amount. Estimate the tax on the result with the sole trader tax calculator.
What Is Not COGS
COGS covers costs that attach to a unit of stock. Anything you would still pay if you sold nothing is an overhead, and it belongs further down the profit and loss statement:
| Cost | COGS? |
|---|---|
| Wholesale purchase price of stock | Yes |
| Raw materials and components | Yes |
| Direct labour to make the item | Yes |
| Carriage-in (getting stock to you) | Yes |
| Rent, insurance, accounting software | No |
| Advertising and marketing | No |
| Your own drawings | No |
The distinction matters because gross profit - turnover minus COGS - is what tells you whether your pricing works at all. Mixing overheads into COGS hides a pricing problem behind a cost problem.
Cash Basis Changes the Timing
Since 2024/25 the cash basis is the default for sole traders, and it does not do formal stock valuation: you deduct stock when you pay for it and there is no closing-stock adjustment. Under the accruals basis you must value closing stock and carry it forward.
Neither method lets you deduct the same stock twice, and both arrive at the same total across the life of the business - they simply differ on which tax year the deduction lands in. What you cannot do is take a cash-basis deduction now and an accruals-style stock adjustment later. Pick a basis and apply it consistently.
If your expenses figure equals what you spent on stock rather than what you sold, your profit is fiction and your tax bill is a guess.
Keeping Records HMRC Will Accept
You do not need inventory software. You need a record that survives a question three years later: units in, unit cost, units sold, units remaining, plus the supplier invoices behind them. Count your stock on your accounting date and write the figure down with the date you counted it.
Under Making Tax Digital, which applies to sole traders with qualifying income over £50,000 from April 2026, your quarterly updates summarise income and expenses digitally. Stock adjustments are still a year-end exercise, so keep the count that supports your closing figure rather than reconstructing it later.
Related terms
- Cash basis accounting - the default method, which skips stock valuation.
- Accruals basis - the traditional method, where closing stock is carried forward.
- Sole trader tax calculator - estimate the tax on your gross profit.
People also ask
Self-employed? Here is when Making Tax Digital applies
If you are self-employed, Making Tax Digital for Income Tax applies to you from 6 April 2026 if your qualifying income is over £50,000, and from 6 April 2027 if it is over £30,000. TapTax keeps your digital records and sends your quarterly updates to HMRC, and it is MTD-compatible.
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Frequently asked questions
What is cost of goods sold?
Cost of goods sold is the direct cost of the items you actually sold during a period. For a reseller it is what you paid your supplier for those units; for a maker it is materials plus the direct labour that went into them. It excludes overheads such as rent, software and marketing, which are ordinary business expenses rather than the cost of the goods themselves.
How do you calculate cost of goods sold?
Opening stock plus purchases during the period, minus closing stock. If you started the year with £5,000 of stock, bought £40,000 more and finished with £15,000 unsold, your COGS is £30,000. That £30,000 is what you deduct, not the £40,000 you spent.
Can I deduct stock I bought but have not sold?
Not under traditional accruals accounting. Unsold stock is closing stock and sits on your balance sheet until it sells, at which point it becomes COGS. Under the cash basis, which is the default for sole traders since 2024/25, you generally do deduct stock when you pay for it, so the timing differs - but only if you are genuinely on the cash basis.
Is cost of goods sold the same as cost of sales?
In practice yes, the terms are used interchangeably in UK small-business accounting. Some accountants use "cost of sales" a little more broadly to include direct costs such as carriage-in or fulfilment fees, while reserving "cost of goods sold" for the purchase or production cost of the stock itself. Either way, both sit above gross profit and below turnover.
Sources
Official guidance on GOV.UK.