What the Treasury does not want you to know. By Keith M Gordon

A rant of mine on the unfairness of this new provision in a client newsletter found its way to the Treasury.

Here is an extract from the response I received from the Financial Secretary to the Treasury, the Rt Hon Jane Kennedy MP:

"I think that the most important point to make about this measure is that it does nothing more than put on a statutory basis the tax treatment that has applied for many years, as Mr Bonney himself acknowledges. In other words, it does not introduce any new tax charge or increase the administrative burdens on business in any way and its only effect is to resolve any uncertainty about whether the House of Lords decision remains valid. That being the case, I cannot agree with Mr Bonney when he says that his clients will suffer as a consequence of this legislation."

It is disappointing that a Financial Secretary cannot understand that this provision presents an administrative (as well as a tax) burden for businesses.

In his press conference on 4 October 2008 Gordon Brown asked for the concerns of small businesses to be heard and acted upon across government.

What we have here is an example of the government refusing to listen and making life harder for businesess. The actions don't match the rhetoric.

It is mooted that the motivation behind the introduction of the measure is to counter tax avoidance.

Don't rule out the alternative.

They don't know what they're doing.

This topic has taxed the minds of many as I have travelled the country lecturing on it this autumn.

Probably the best illustration of it in action was from the delegate who worked for a property developer sitting on unsold residential development. Because of the age of the land bank (average cost £500 per plot) there was still some £100,000 profit per property in the market value (this in late November 2008). Rental income stream would be extremely modest compared to value of property. So if forced to recognise profit then the rent would not even cover the tax liability on the deemed profit. Sales not forthcoming as lack of mortgage funding artificially cutting off demand (this in an area where the main regional lender is withdrawing from the market - somewhere quite a bit north of Watford!).

So what to do? If forced to recognise the profit then it is not worth letting and they would be better off leaving them empty. There is a strong argument that any letting is temporary and thus the property should be left in stock awaiting sale - there has been quite a bit of debate about this as an accounting approach over the last few months.

All in all I am mystified by this change. Why do it? OK nobody could have predicted the savagery of the recession, but even in March things weren't looking good. Or were there schemes afoot, as you say Vaughn? The commencement date smacks of anti avoidance - not much changes on Budget day anymore (except booze and fags) so someone thought this was urgent.

Finally this flies in the face of around 8 years work aligning accounting and tax - as a policy move it does not really stand up to scrutiny so we must assume that it was anti avoidance - but then why be coy about it? Not the normal approach at all.

I remain puzzled.

On the basis that the item is in trading stock, by implication it is as a result of unforeseen circumstances that the transfer is needed.

Traders generally take items over or transfer to fixed assets because:

1) They cannot sell it due to lack of buyers (property developers etc). So at some point the market value can be argued to be roughly cost.
2) Damaged produce - market value negligible.
3) Items past their sell by date - market value negligible.
4) Items not actually for direct re-sale so market value is cost.

These Treasury "oddities" usually occur for a reason. Has someone been up to something with a scheme of some sort?

Transfers from fixed assets to trading stock crystalise a gain, but of course the gain (or indeed loss) can be heldover under S161TCGA 1992. This was to avoid unfairly taxing unrealised gains. One does wonder why this is not a "two way street"!

Personal use of stock is another point. What if Mrs Wernher had left the horse in the stud accounts and applied a private use adjustment? I have seen motor traders with say a Ferrari "in stock" that never actually gets sold but has a run to the Golf Club each week "to stop it seizing up".. It is often the "ring to make an appointment to view" car in adverts!

I would be interested to hear of readers actual experiences in these areas as I have not had any great trouble over the years.

we are shown what the Govt means by "fair amount of tax" ...

Keith you should better. Even if meant that the Treasury was to sell your elderly aunt into slavery they would not allow you the oxygen of publicity because it would amount to a loss of revenue. The Treasury is about to undergo a political reconstruction in the near future. Lets hope your aunt lasts that long.