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LAWCOMM 403 long notes.docx
LAWCOMM_403_long_notes.docx
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LAWCOMM 403 long notes.docx-CONTENTS Tips ...........
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
LAWCOMM 403 long notes.docx-CONTENT...
LAWCOMM_403_long_notes.docx-CONTENTS Tips ......................................................................................................................................................................................... 4 Introducon ............................................................................................................................................................................
Page 106
This rule means that tax planners are very focused on the closing value of trading stock – the less the closing value, the
less you have to add back and the more deducons you get
VALUATION OF TRADING STOCK
Trading stock is valued by one of the four methods in
secon EB 4
(
secon EB 3
):
o
Cost
o
Discounted selling price
o
Replacement price
o
Market selling value
o
In pracce, trading stock is usually valued at either cost or market selling value (if it is less than cost)
The main problems in valuing trading stock are:
o
stock is commonly not sold in the order it is purchased; and
o
the value of stock somemes falls below cost (for example in the fashion industry)
Valuing with the cost method
o
A person may determine the value of their closing stock at cost. If the person chooses this method, they must
include and allocate costs under
generally accepted accounng pracce
(
secon EB 6(1)
)
o
There are two cost-flow methods (
secon EB 7
):
First-in first-out method (FIFO)
Weighted average method
If items of trading stock are not separately idenfiable (e.g. a supermarket stocking cornflakes as they
don’t record what they paid for each box), you MUST use one of these methods, but if they are
separately idenfiable (e.g. cars or boats, for which a dealer does keep a record for what they paid for
each one), you MAY use one of these methods
NON-MARKET VALUE TRANSACTIONS
If trading stock is disposed of for no consideraon or for less than market value, then (
secon GC 1(1)
):
o
The trading stock is deemed to have been sold at market value (
secon GC 1(2)
)
o
The deemed price is treated as income
o
The purchaser is deemed to have purchased the stock at the deemed price
If this rule wasn’t in existence, people could collude to avoid paying tax
o
When selling a business, trading stock is oſten sold together with other assets (e.g. the building in which the
business operates on) – you could say that most of the proceeds were a non-taxable capital gain on the sale of
the building, and that you sold very lile trading stock to avoid paying tax on the income received on selling
trading stock
Sharkey v Wernher
[1956] AC 58 (HL)
o
Judgment
Where a trader takes stock from his business for private use or for use in another business which he
owns, or where he transfers to his business stock which he owns in some other capacity than that of
proprietor of that business, the transfer should be dealt with for taxaon purposes as if it were a sale
or purchase at market value. Thus, goods which a trader takes from his trading stock (for example, for
the personal use and enjoyment of himself and members of his household) should be credited at
market value
In short, trading stock taken out of a business and applied for private usage is a deemed sale of the
trading stock
o
Note
This case is consistent with and adds to secon GC 1
MATCHING RULES FOR REVENUE ACCOUNT PROPERTY
“Revenue account property” means either trading stock or property that would produce income on disposal (
secon YA
1
)
o
This includes residenal property sold and covered by secons CB 6, 6A, 7 etc.
o
This includes personal property bought for the purpose of resale
The cost of revenue account property (other than trading stock) is generally deducble when it is sold (
secon EA 2
)
o
Secon DB 23
authorises the deducon
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