One of the surprises in this year’s budget was the statement:
“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.”
The ‘long established rule’ refers to the 1955 decision by the House of Lords in the case of ‘Sharkey v Wernher’. An example illustrates the principle in its simplest form. A shopkeeper buys tea from the cash and carry at a wholesale price of £1 and puts it on sale in his shop at £2. He then takes it off the shelf and uses it for his own family. Under the Sharkey principle which is now confirmed in FA 2008, he should include £2 in his business turnover and pay tax on the £1 notional ‘profit’ that he has made.
The legislation applies widely to businesses of any size where stock is appropriated either for personal use or for any purpose other than sale in the course of trade.
During the committee stages of the Finance Bill, Kitty Ussher (the government minister responsible) was at pains to point out that the new rules (in her view) merely maintain the status quo, including the manner in which the rules were operated in the past.
This has gone some way to quell our fears that this legislation represented an extension of the principle to new areas, but doubts remain. In the past, HMRC’s own instructions were to take a reasonably broad view in applying this principle, but these instructions are to be withdrawn. Now that legislation is in place, it will be difficult for any court to exercise similar discretion. We await new guidance.
Certainly our advice to businesses is to be alert to the issue. There is a question of what is the ‘market price’ that should be used, particularly where perishable goods are concerned. Try to separate private purchases and only put business purchases through the books. Careful record keeping will make it easier to repudiate any enquiry on this issue. It remains important to take professional advice where these new rules may be an issue.
For further information speak to your usual Ensors contact or Henry Wood
