As readers will be aware, the Government decided to include provisions in this year’s Finance Act that require businesses to account for profits that they do not actually make, when they appropriate trading stock for non-trading purposes.
The history behind this statutory provision can be simply stated. For the past 50 years, the Revenue have found the House of Lords’ decision in Sharkey (HM Inspector of Taxes) v Wernher, as Arthur Daley would have said, “a nice little earner”. That decision purports to say that traders, who appropriate stock from their trade, are to be taxed as if they had actually sold the stock at the then market value. In other words, they are assessable on the profits that they would have made had they been able to sell the stock to an unconnected party.
Challenges to the rule
In the years that have followed there have been some complaints from a number of quarters about:
In the early part of this century, spurred on no doubt by the formal recognition by statute (FA 1998, section 42) that the profits for tax purposes should generally be based upon the accounting profits, a number of practitioners and writers started to make their criticisms of the rule heard more widely. As one of those to have published criticisms of the rule see, for example, Sharkey Revisited in Taxation. I am aware of a number of practitioners who have been able to negotiate some favourable deals with the Inland Revenue/HMRC in order to settle disputes concerning the appropriation of stock.
This year’s Finance Bill
Clearly, HMRC were getting worried about the number of challenges to their little goldmine because this year’s Budget Notes included the announcement that the rule was going to be enshrined in statute with effect from Budget Day so as to stop any further challenges (of course, challenges can continue to be made in respect of pre-Budget day appropriations and it might be advisable for taxpayers to consider making an error or mistake claim in respect of such cases before time runs out).
This led to more complaints about the rule and also the underhandedness of the proposal but, as one has come to expect, those complaints fell on deaf ears. So, it remained for the democratic processes of the Parliamentary debates to tease out some further issues.
During the debate, the then Economic Secretary to the Treasury, Ms Kitty Ussher reassured her fellow Parliamentarians that everything was under control. First, the new statutory provisions would not change anything (carefully omitting that there were serious doubts about the validity of the Sharkey v Wernher rule). More importantly, Ms Ussher told the debate that the Government was doing no more than complying with the wishes of “the normal types of body that one would expect—the trade associations and the accountancy and legal professions” (Kitty Ussher, Economic Secretary to the Treasury, Hansard, 20 May 2008, Col. 311).
Freedom of Information Act
As some readers may know, I was intrigued so I sent off a Freedom of Information Act request to ascertain who were those trade associations and representatives of the accountancy and legal professions.
Initially, I failed to get any response within the period stipulated by the Freedom of Information Act itself. Nor did I get any response when I made a formal complaint. Fortunately, I was one of the speakers at the ICAEW’s Wyman Debate this year and the opportunity arose to highlight this apparent failing. Consequently, shortly after the Finance Bill obtained Royal Assent and Parliament entered its summer recess, the eventual response came.
As I reported in the disclosure revealed that the Minister had been a little economical about the truth. For instance, there were no trade associations who had made any such request. And there was only one legal and accountancy body to whom any apparent support could be attributed – that was the Chartered Institute of Taxation (CIOT). Yet it was clear that the CIOT had not done anything like make any such request – the Treasury simply took some comments made by the CIOT out of context in order to justify their assertion that the statutory change had been asked for. Furthermore, the CIOT was one of the two bodies that had specifically objected to the proposal! – a point actually acknowledged by the Treasury in their response to me. Register of Freedom of Information Act requests During my research of the Treasury’s FOI procedure, I had stumbled across their I therefore wondered how long it would be before my request would make it onto the list. After a couple of months, I sent the Treasury an e-mail, only to be told that they did not consider my request to be of wider interest. I pointed out that the website purported to provide a register of requests “where the material is new or of wider interest”. The official responded saying that their policy was in fact to show only those disclosures “where the material is new and of wider interest” and therefore mine did not meet the criteria for inclusion – and the website was amended to reflect the new (or restated) criteria. I gently pointed that a statutory change in the Finance Bill that could affect hundreds of thousands of taxpayers (from small businesses to large corporations) could arguably come within the criterion of fairly wide interest. I also noted (perhaps a little less gently) that the fact that a Minister (not necessarily deliberately) had apparently misled Parliament might also be of interest – given that the Profumo affair showed that that was far more heinous a misdemeanour than the mere cavorting with prostitutes. Eventually, the Treasury official accepted that the disclosure might be of wider interest than previously suggested. However, he continued to maintain that the response I was sent still failed to warrant publication on the website – even though he accepted that the criterion was as stated above (i.e. new and of wider interest). Thus, it looks as if I cannot rely upon the Treasury to tell people how the Sharkey v Wernher rule came to be codified. Footnote Readers might be interested to learn, however, some of the matters that the Treasury does consider to be of wider interest: It is perhaps worrying (especially in these times) that the Treasury seems to believe that these matters are so much more important to taxpayers than the truth about the Sharkey v Wernher rule. I do hope that their stewardship of the country’s finances shows better judgment. Keith Gordon MA (Oxon) FCA CTA(Fellow), is a barrister, chartered accountant and tax adviser. He practises from Atlas Chambers. Tel: 020 7269 7980 and can be contacted by e-mail at keith@keithmgordon.co.uk.