Costs are defined as something that has to be paid or spent to acquire something. Costs include the acquisition of:
- An object, say material required to convert into saleable goods.
- A service, for example, sub-contact labour or
- A right, the rates you pay to occupy business premises.
In your accounts, these costs would appear as expenses or cost of sales in your profit and loss account. All of these costs have something in common, their usefulness tends to be restricted to the time at which they were purchased.
But what about costs – say the purchase of computer – that should have a working life of say five years? This type of expenditure will not appear as a deduction from your profits as an expense, instead, it will appear as a fixed asset on your balance sheet and will be written off – over five years in the case of our computer – by depreciation.
We need a new word to describe this type of expenditure and the one we use is “investment”.
The distinction between a cost and an investment is significant. Generally speaking, a cost has value for a limited time period whereas an investment has the ability to impact current and future trading prospects.
As we emerge from lockdown, do not underestimate the recovery value of investment for your business. And government has offered company investors a timely tax incentive to invest.
In his recent budget, Rishi Sunak announced that qualifying investment in equipment would attract a 130% deduction for tax purposes (applies to companies from 1 April 2021 to 31 March 2023). It’s worth considering this distinction. Costs will sustain your current trading performance, but investment expenditure will have the potential to create new opportunities in future years.