Appropriation From Stock
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Impact of Private Usage on Farms incorporating Equine and Bloodstock
from Trading Stock
trading stock is taken from a business it must
now be recorded at market value. There
should be a notional accounting entry for the appropriation at this
long established rule in Sharkey [HMIT] v
Wernher (1955) 36 TC 275 is still applicable. The rule established is
that goods taken from
stock by a trader, for his own consumption, are to be valued, for the
of calculating taxable profits, at market value, taken to be the price
the trader would have charged for the goods, had they been sold to a
party in the ordinary course of his trade.
types of expenditure might these typically cover
for the farming and bloodstock worlds?
and straw used for
materials provided to
the shoot by the farm.
of entries could be:
using 400 bales of hay @ £4 (market value) a bale
Sale of hay
tonne of wheat for pheasant feed @ £160 (market value) per tonne
Sale of corn
practitioners had argued that the rule in Sharkey
v Wernher conflicted with generally accepted accounting
which require goods taken for own consumption to be valued at cost. They claim either that the
decision in Sharkey v Wernher was
made (by the House
of Lords), per incuriam, or that
has become more significant, for tax purposes, since 1955.
Secretary to the Treasury informed the Committee that the Statement of
A32 Goods taken by traders for personal
consumption will be withdrawn.
Accordingly, the position of farmers - or at least farmers
accepted the validity of the rule in Sharkey
v Wernher – will in practice be unaffected by the change from
case law and
Statement of Practice to the 2008 Finance Act.
Calculating Market Value
is the nature of
the farming, equine and bloodstock industries that there will be a
purpose involved in the expenditure.
us, for example, look at each of all the points raised above. It must be remembered that
legislation only relates to the disposition of trading stock and work
progress and not to the provision of services or to the disposition of
materials or consumables. Market
is the price “it would have sold in the market at the time” of the
Horses may be used to ride
round the farm to inspect livestock, crops etc.
With increasing costs of fuel this use becomes very
Livery owner uses own
horse to give lessons on and the income is included in the Accounts. The horse is used as a
safe lead when
exercising other horses and used to ride out with owners to discuss
and instructions. What
of the private
use of such horses?
The days shooting are only
taken to control the shoot and to assess feedback from the guns
the need to entertain fellow guns.
horses in training
Is a trainer taking goods
for private use, appropriating stock or marketing his business when
shares (or legs) in race horses?
The way a race horse
trainer has to build the business, convince owners to have faith in the
develop owner relationships and use spare capacity means they have to
shares (“legs”) in horses they train themselves and consider the
between private use, appropriation for stock and marketing cost.
key has to be for
the accountant/tax adviser to understand the client and to help them
Provision of Service
A32 states that inspectors should “take a reasonably broad view” of the
Sharkey v Wernher principle. Specifically it states:
case of Sharkey v Wernher (1955) 36
establishes the principle that where a trader takes stock from his
private use or enjoyment or disposes of stock otherwise than by sale in
normal course of trade, the transfer should be dealt with for taxation
as if it were a sale at market value.
Inspectors have been authorised to take a reasonably broad
applying this principle.
decision is not
considered to apply to:
rendered to the
trader personally or to his household which should be dealt with in
with section 74(1)(b), Income and
Corporation Taxes Act 1988 [now section 34(1)(a), Income Tax (Trading
Income) Act 2005];
value of meals provided
for the proprietors of hotels, boarding houses, restaurants etc, and
their families which should also be dealt with on the basis that
incurred by a
trader on the construction of an asset which is to be used as a fixed
that (a) and (b) above are covered by new section 172A(2)(b), which
‘trading stock’ (to which the market value rule applies) does not
services performed in the ordinary course of the trade’. ‘Services’ are apparently
taken to include
the ‘service’ of cooking or otherwise preparing food in a hotel or
rationale of (c) above seems to be that
the trader intended at the outset (at the latest, from the moment he
construct the asset) that it would be retained as a fixed asset of his
while the asset
was under construction, it never became part of his stock of goods for
equine clients work very hard and find the concept of private usage or
appropriation of stock or private use difficult to understand and will
clients might try and
understand private usage but good practice has always been to
the nature of the usage and to present a fair figure.
The Finance Act 2008 has not changed that in
any way – there is just greater emphasis on understanding what the
undertaken with regard to appropriation from stock and what they might
undertake in the future.
Finance Act 2008
highlights the question of appropriation of stock at deliberate
principle does not apply
to “bad bargains” or knowing there is a “loss leader” to bring in more
sales. The 2008
Finance Act endorses the case Skinner v
Berryhead Land Ltd 46, STC 377
where land was sold at undervalue by a land dealing company and the
value was deemed by the court to be the correct figure. It is likely that such
transactions could be
debated by the District Valuer (DV) so if an independent valuation must
obtained this will help define market value and negotiations with the
with Capital Gains Tax
of Chargeable Gains Act (TCGA) 1992 provides that an appropriation of a
asset into trading stock crystallises the chargeable gain, as if the
been disposed of on the open market at that time.
Section 161(3), however, allows an election
whereby no gain arises under section 161(1) and the asset becomes
at market value less the accrued gain (which effectively brings the
stock at cost plus indexation). Section
173 extends the rule for groups of companies, to allow a transferee
company to elect that a capital asset transferred from another group
brought into trading stock at market value less the accrued gain.
new provisions do
not mention these capital gains rules at all
Communication and Understanding
and understanding of the business needs and history are the matters
prove to be of key importance.
About the Author
Article supplied by Julie Butler F.C.A. Butler & Co, Bowland
House, West Street, Alresford, Hampshire, SO24 9AT. Tel:
01962 735544. Email; firstname.lastname@example.org, Website; www.butler-co.co.uk
Julie Butler F.C.A. is the author of Tax Planning for Farm and Land
Diversification ISBN: 0754517691 (1st edition) and ISBN: 0754522180
(2nd edition) and Equine Tax Planning ISBN: 0406966540. The
third edition of Tax Planning For Farm and Land Diversification will be
published shortly. To order a copy call Tottel Publishing on
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Article Published/Sorted/Amended on Scopulus 2009-03-02 14:14:33 in Tax Articles