CORPORATION TAX - 29.11.2012

Can a stock-take save you tax?

If your company’s financial year-end is approaching, you’ll probably already be thinking about the dreaded stock-take. How can you turn this annual chore into an opportunity to save Corporation Tax?

On the shelf

You might not realise it but your company has paid for each stock item on your shelves at the end of the year without receiving a tax deduction for them. At least not yet. Only the stock sold during the year reduces taxable profit. Running down stock towards the year therefore makes good sense, but it’s not the only measure you can take to reduce your company’s tax bill.

The value of closing stock

It’s not just the number of items and how much you paid for them that determines the stock value for your annual accounts, there’s a special valuation rule. In this respect the Taxman follows accounting principles and these say that stock must be valued at the lower of:

  • cost - this is the price you paid for the item plus other expenses incurred in bringing it to its current location, namely transport costs; and
  • net realisable value - this is the price you estimate the items can be sold for less any transport costs needed to complete the sale.

Tip. You’re allowed, in fact you’re required, to make a realistic valuation of stock. This means items you think will have to be sold at a discount to shift them must be revalued if the second point above applies.

Example. In 2011 Acom Ltd, a wholesale business, spent £21 per unit on a line of summer goods. These didn’t sell well in the 2011 season, but Acom marketed them again in 2012 at a reduced price of £25 each; i.e. still above cost price. They didn’t shift any items and now with its 2012 financial year about to end Acom still has 500 units on hand. The sales director decides to offer them to customers for just £10 each to shift them. Acom must revalue this stock for its 2012 accounts at 500 x £10 = £5,000. This compares to the £10,500 cost amount included in the 2011 accounts. Acom will get a tax deduction for the £5,500 drop in value.

Staff awareness

In our example the need for a stock revaluation was obvious, but that’s not always the case. For example, are there items lurking at the back of your shelves which are faulty or have damaged packaging and so your workers avoid selling them? The longer they sit there the less likely they are to be sold. You can probably revalue these items but you need to know about them first.

Tip 1. Make your staff aware that they should record all items of damaged stock when they find them. You can revalue these at the year-end.

Tip 2. Compare last year’s stock report with this year’s. If you identify items you’re certain can’t be sold, scrap them or give them to customers as a freebie. This won’t usually trigger any tax consequences other than reducing the value of your stock for accounting and tax purposes.

It’s a write-off

A final word of warning; you’re not allowed to take a broad brush approach to revaluation. For example, you can’t adjust down the value of stock because year on year you know you’ll have 5% wastage. The key to tax deductions for devalued stock is to have a thorough stock-take procedure and well informed staff.

Identify stock that’s not selling, damaged or faulty. Replace the value of these items currently included in your stock list with the amount you expect to get for them where this is lower than cost. You’ll get a tax deduction for the write-down. Make sure staff know they must keep a record of damaged and faulty stock.

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