HMRC makes a big deal of business owners taking stock from their companies and there are tough rules which impose a stiff tax charge. However, there are many exceptions which HMRC is less keen to mention. What are they?
Stock take
One of our subscribers runs a furniture-making workshop. Sometimes he takes materials from stock to make products for personal use or for gifts. His bookkeeper removes the cost of the materials from the company books and declares it as a taxable benefit in kind. Our subscriber thought that covered all the tax angles, but HMRC said that the personal use of “stock” must also be shown as sales in the company’s accounts. This would increase the taxable profit.
What’s HMRC’s problem?
HMRC’s view has always been that stock taken from a business by the owner should count as a sale at market value (MV), i.e. what the item could be sold for to a person not connected to the business, rather than an adjustment to remove the cost of the items from purchases. To ensure it got its way, HMRC twisted the government’s arm to bring in legislation in 2008.
When doesn’t the 2008 law apply?
The MV rule for stock taken doesn’t apply to businesses that prepare their accounts using the cash basis (companies can’t use this). Neither does it apply to services provided by a business to its owners, nor for meals provided to owners of hotels, restaurants, etc. There are different rules for these situations.
What counts as stock?
Our subscriber’s local tax inspector said stock includes materials, such as those taken in this case, and quoted HMRC’s Business Income Manual (BIM) as his authority. This says that stock “includes raw materials and consumables, that is materials that are used up in the production process” . However, this definition doesn’t always apply.
Different definitions
The meaning of stock given in HMRC’s BIM is the general one based on accountancy rules and which applies when a business ceases. It doesn’t apply to stock taken from a business for personal use. The law defines this as items “sold in the ordinary course of trade” , and excludes “materials used in the manufacture, preparation or construction of any such thing” . Our subscriber only took materials and so his bookkeeper’s approach was correct and the inspector’s view was not.
Misleading guidance
We can’t find anywhere in HMRC’s BIM that explains the different meanings for stock. It’s no wonder tax inspectors get it wrong.
Tip. Your business only has to account for goods you take from it as if you paid MV if they are items it normally sells (including partly manufactured products). If an over zealous tax inspector suggests otherwise, explain the apparently misleading advice in HMRC’s BIM and point them to the legislation which sets out when MV applies and what it applies to.
This article has been reproduced by kind permission of Indicator – FL Memo Ltd. For details of their tax-saving products please visit www.indicator-flm.co.uk or call 01233 653500.