Reliable stock values
The Taxman’s case against a husband and wife’s business contended that the stock figures in the accounts were little better than guesses. How can you protect yourself from a similar line of attack?
Focus on stock figures
Back-to-basics. You probably know this already, but the higher your stock figure, the higher your profit and vice versa. Why? Because the stock figure moves costs you incurred this year into the next accounting period, leaving less expenditure in this year to offset against your sales - hence a higher profit figure for tax purposes. For example, if you pay Corporation Tax at 19% then for every £10,000 you can reduce your stock figure by you can save £1,900 of tax (£10,000 x 20%). So can’t you simply put in the figure you want? This is certainly one way of going about it. But the Taxman is wise to this and invariably picks on the stock figure as part of an aspect or full enquiry, as he did in this recent case.
Taxman’s case. A recent case before the Special Commissioners (SpC), considered an appeal by a retail business against estimated assessments raised by the Taxman (R & JM Pooley SpC 525). He had concluded that the accounts submitted had understated takings and overstated closing stock and issued assessments to cover all the years under review (all six of them!).
Records. The Taxman’s main point of attack was that there was “no direct reliable evidence of contemporary records of stock valuations, stock takes, or records to derive reliable stock values” as no annual stock takes had been performed. The SpC accepted that the accounts and returns were little better than guesses.
The good news. However, the SpC rejected the Taxman’s assessments for later years because they had been plucked out of the air with no basis in fact to support them. Estimated assessments must be justified, and in his opinion the use of gross margin analysis is likely to be the best method of arriving at an accurate figure.
Protecting yourself
Recap on records. The Taxman requires you to keep adequate accounting records. Which for goods means including stock records and an annual stock take. Surely everybody does this? Yes, but the focus can end up not on the records themselves but on the gross profit margin achieved by the business. Forewarned is forearmed so…
Tip 1. Review the gross profit margins in your annual accounts for reasonableness and consistency with prior years/industry averages. Gather explanations now to explain variations from the perceived norm, should you be challenged by the Taxman later. Where results are unusual this could be due to damaged stock, price reductions, obsolescence, to name but a few.
Tip 2. If the results for a period are abnormal, consider providing an explanation in the white space of your CT return. This may prevent an enquiry, protect against subsequent discovery and so reduce the risk of an enquiry going back another five years.
Tip 3. One of the most likely reasons for variation is stock write-downs. The advice here is to make your write-downs as specific as possible. Look at each stock line and make a good case for each one that’s worth less than it cost you. Telling the Inspector that 10% of your stock is worthless will not be accepted. Like most general provisions it’s not tax-deductible.
For examples of stock write-down explanations visit. http://tax.indicator.co.uk (TX 06.17.06).
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