Budget 2008 > Business > Trading stock - transfers at market value
 

Trading stock - transfers at market value

From 12 March 2008, businesses that appropriate trading stock for a different purpose (e.g. for private use or longer-term investment) will be treated as if they had sold the stock at full market value, and the business will be taxed on any resultant notional profits, notwithstanding the accounting treatment.

There has been a long-standing debate over whether this type of transaction should be taken as creating notional taxable profits, and if so, how the notional proceeds should be valued.

Following long-established case law (Sharkey v. Wernher, 1955^[1]), HMRC have persisted in the general view that regardless of what money may or may not change hands, or what value is put on the transaction for accounting purposes, the appropriation of trading stock for private or other purposes should be taxed as a market value sale (Statement of Practice A32, 1978).

However, to date this has not been made explicit in statute. Alternative case law has supported a contrary view (Mason v. Innes, 1967^[2]). Such was the uncertainty that the recent tax law rewrite could not fully expose the point within the parameters of the original legislation.

Finance Act 1998 also complicated the matter by stating that businesses are taxable under their profits computed according to “generally accepted accounting practice, subject to any adjustment required or authorised by law”. If HMRC’s practice in this area is not explicit in law, then there is an argument in the taxpayer’s favour that this 1998 statute rule overrides case law, and any taxable trading profits should be based on accounting profits rather than market value.

Today’s announcement puts the matter beyond debate for appropriations of stock from 12 March 2008. The appropriation of stock for another purpose (e.g. private use, investment) is a taxable event, and market value should be used for the calculation of taxable trading profits. This has been presented by HMRC as the confirmation of the prevailing treatment but clearly some will disagree.

Draft legislation indicates that where the transfer pricing rules apply (which already require arm’s length prices for related party transactions), these will take precedence. Likewise, the tax treatment is unchanged on the appropriation of investment or private-use assets (or similar) into trading stock, including the facility to elect to rollover gains into the base cost of the stock in cases of appropriation of chargeable assets into trading stock in a UK business.