Budget Notes

BN19 TRADING STOCK

Who is likely to be affected?

1. Businesses that dispose of or appropriate goods from trading stock other than in the course of trade and businesses that acquire or appropriate goods into trading stock other than in the course of a trade.

General description of the measure

2. Legislation will be introduced in Finance Bill 2008 to put on a statutory basis a long established rule which has effect where goods are appropriated into or from trading stock other than by way of trade. In such circumstances, the profits of the trade for tax purposes should be adjusted to replace the cost of the stock or the actual proceeds with their market value.

Operative date

3. The measure will have effect for all transactions whereby goods are appropriated into or from trading stock other than in the course of trade on or after 12 March 2008.

Current law and proposed revisions

4. Business profits for tax purposes are generally calculated in line with Generally Accepted Accounting Practice (GAAP). This has a statutory basis in section 42 of the Finance Act (FA) 1998 as amended by section 103(5) of the FA 2002.

5. However, section 42(1) of FA 1998 makes clear that this basic principle is subject to 'any adjustment required or authorised by law in computing profits for those purposes'. In other words, tax law, either in statute or case law, will take precedence in situations where it differs from accountancy practice.

6. One example in which GAAP differs from tax law in this way is where business stock is disposed of other than by way of a trading transaction. Under GAAP, such a transaction should be credited to the accounts at either the cost price of the stock or at the price actually paid on the disposal. However, for tax purposes, the GAAP treatment is overridden and the tax computation needs to be adjusted to reflect the appropriation from stock at market value (the market value rule'). This rule has been in place for many years.

7. The market value also has effect where goods are acquired or appropriated into trading stock other than in the course of a trade.

8. Legislation will be introduced in Finance Bill 2008 to put the market value rule on a statutory basis. Its effect will be to preserve the current tax treatment of non-trade appropriations of goods into and from trading stock.

9. Draft legislation and explanatory notes have been published today on the HM Revenue & Customs website.

Further advice

10. If you have any questions about this measure, please contact Craig Mason on 020 7147 2599 (email: craig.mason@hmrc.gsi.gov.uk) or Fiona McRobert on 028 9093 9722 (email: Fiona.mcrobert@hmrc.gsi.gov.uk). Information about Budget measures is available on the HM Revenue & Customs website at www.hmrc.gov.uk