For retail companies, the end of year stock-take is crucial to getting the corporation tax calculation right. How can the company save money?
Company tax rules – recap
A company cannot use the cash basis to prepare its accounts. As such, it must adhere to the principles laid down under generally accepted accounting principles (GAAP). One outcome of this is that the company doesn’t simply deduct amounts it has paid for stock in the year from its income. Instead, only the stock sold during the year reduces taxable profit, determined by the stock-take. Running down stock towards the year end therefore makes good sense, but it’s not the only measure your clients can use to save tax.
Valuation of stock
It’s not just the number of items and how much your company paid for them that determines the stock value for the annual accounts, there’s a particular valuation rule. In this respect HMRC follows accounting principles and these say that stock must be valued at the lower of:
- cost – this is the price the company 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 your company estimates the items can be sold for less any transport costs needed to complete the sale.
Pro advice. You are permitted to make a realistic value of the stock in hand. If you think that items will need to be discounted in order for them to sell, revalue them if this will take the price below the initial cost.
Example. In the year to 31 July 2020 Acom Ltd, a wholesale business, spent £21 per unit on a line of summer goods. These didn’t sell well, so Acom marketed them again in the year to 31 July 2021 at a reduced price of £25 each, i.e. still above cost price. They didn’t sell any items and now with its 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 try to get rid of them. Acom must revalue this stock for its July 2021 accounts at 500 x £10 = £5,000. This compares to the £10,500 cost amount included in the 2020 accounts. Acom can claim a tax deduction for the £5,500 drop in value.
Other opportunities
In the example above, the need for revaluation was relatively obvious. But you can also check their stock for items that are damaged or faulty, but still capable of being sold. Even some damaged packaging can mean a discount is required. Often these items go unnoticed as company staff will avoid selling them.
Pro advice. Make your staff aware that they should record all items of damaged stock when they find them. You can then revalue these at the year end.
Pro advice. Compare last year’s stock report with this year’s. If you identify items you know can’t be sold, scrap them or give them to customers as a free giveaway. This won’t usually trigger any tax consequences other than reducing the value of stock for accounting and tax purposes.
Write off the right way
You are not allowed to take a generic approach to revaluation. For example, you can’t adjust down the value of stock because year on year you know they will have 5% wastage. The key to tax deductions for devalued stock is to have a thorough stock-take procedure and well-informed staff.
Revalue stock that needs to be discounted in order to sell before the year end to claim a corporation tax deduction. Train staff to highlight damaged or faulty items during the year, rather than ignoring them, so that they can revalue these as part of the stock-take process.
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.