Trading stock

Trading stock

Didn't find your answer?

My client received some goods as a gift. He later used these goods as trading stock when he started his own business as a sole trader. For accounting and taxation purposes, can he allocate a cost to the goods as though he had purchased them at market value or should he show them at nil cost and increase his profits and tax liability?

Replies (30)

Please login or register to join the discussion.

Euan's picture
By Euan MacLennan
26th Jan 2013 10:51

Mmm ...

So, if the client receives goods for nothing and then transfers them to his business at market value, hasn't he made a taxable profit as an individual which should be disclosed on his tax return along with his (reduced) business profits?  It would be easier to transfer the goods into the business at cost (nil) and make the profit in the business.

Thanks (0)
By George Attazder
26th Jan 2013 11:21

@Euan

But that's what section 172C ITTOIA 2005 says you have to do; introduce it at market value.  

Since in his capacity as a private individual, the trader isn't trading in the goods concerned, the gain he realises on transferring the goods to the business doesn't have the character of income; he's made a capital gain, quite likely within the chattels exemption.

The tins of baked beans in my pantry are my personal chattels, but if they're introduced to my grocery business, they become stock of the grocery business at there then market value and I've made a capital gain or loss on them, that I'm sure would fall within the chattels exemption, apart, perhaps, from my tin of 1944 spicy baked beans, that may have some antique value!

Your suggested method, probably brings about an unnecessary tax liability.

Thanks (2)
By George Attazder
26th Jan 2013 14:12

On what...

... do you base your assumption that the value at the time of gift is the same as the value on transfer?

The value of things can go up and down.

Basic stuff!

Thanks (2)
Stepurhan
By stepurhan
26th Jan 2013 14:26

Contradiction

@fawltybasil

In your first answer you said bring it in at market value. In your second answer you are now saying that it has nil value because it was originally a gift. The market value of an item is not based on its provenance so clearly these two figures must be different. If you are going to accuse others of poor answers and lack of knowledge, at least be clear on your own position.

I am with George on this one. The treatment makes sense and this would also seem to give the best result from a tax point of view.

Thanks (3)
By George Attazder
27th Jan 2013 09:24

Oh I see!

Because the OP didn't say that there was any change in value between the date of the gift and the date of the transfer, the correct thing to do is to respond with the assumption that there wasn't one.

Thank you for putting me straight.

Thanks (3)
avatar
By User deleted
27th Jan 2013 13:34

@Basil

Your criticism of George is unwarranted - and incorrect. You place great emphasis on the word 'if' - it is indeed correct that 'if' the value at date of gift were the same as the value at date of transfer there would have been no profit in the individual's hands. However, before that statement you made an unqualified statement that George was wrong. You also made an unqualified statement that the individual has NOT (your emphasis) made a taxable profit. Your subsequent sentence about there being no profit if the two values were equal is correct, but stands on its own, ie it is a non-sequitur as far as your two previous comments are concerned.

If there was any misinterpretation of your words it is because they were carelessly chosen. What you ought to have started off by saying was that George would be correct only if there was an uplift in value between gift and transfer. But you categorically said that he was wrong - period. It is you that owes George an apology for sloppy drafting of your comment.

Thanks (4)
avatar
By User deleted
27th Jan 2013 22:19

Tosh

Two wrongs do not make a right.

George obviously made an assumption (a reasonable, and obvious, one in my view) that there may have been an increase in value between gift and transfer. I agree that it would have been better if he had stated that assumption, although it was so obvious to everyone - apart from one, it would seem - that it wasn't necessary. In any event, that does not give you the right to make the unqualified, categorical, statement that he is wrong. As such, you still owe George an apology for failing to qualify your accusation that he was wrong. (Though it is clear from the tenor of your words that no such apology will be forthcoming.)

Why would George have mentioned a futher gain or loss? He was merely answering the OP's question, which was about the value to be attributed on transfer of the asset to the business. Future profits or losses on sale are wholly irrelevant to that question. Therefore, saying that a failure to refer to subsequent gain or loss is to imply that there is no such further gain or loss is an alarming misinterpretation on your part.

For the avoidance of doubt, I fully understand what George was saying. You clearly do not, and it seems that you do not fully understand what you are saying yourself:-

You said "He has NOT made a taxable profit as an individual at all". There is no qualification in that statement and the emphasis on NOT imputes further certainty into your words.

You then go on to say "To say that something DEFINITELY HAS happened, when you know only that it might possibly have happened, makes it "wrong"".  I will take that as an admission that you were wrong. Thank you.

 

Thanks (3)
avatar
By User deleted
28th Jan 2013 09:14

So many words ....

.... yet so little said.

For the hard of understanding - yes I agree that there is no gain mentioned, explicitly or otherwise, in the original question. But George's assumption - which was in fact obvious to me even if it wasn't to others - was a perfectly reasonable one to make. Depending on the time involved, I'd say that it was more likely than not that a gain will have arisen.

But in any event it is also true that the original question does not say, explicitly or otherwise, that there was NO gain. So in categorically stating that there was NO gain, you are just as wrong as you claim George to be.

Until you acknoweldge that point, no-one (at least not this writer) is going to support your arguments.

And, BTW, shouting does not help.

Thanks (3)
By Steve Holloway
28th Jan 2013 10:23

@basil

Leave the attitude and CAPS lock off ... did your mother not tell you that nobody likes a smart-[***] let alone an arrogant one?

Thanks (4)
By George Attazder
28th Jan 2013 11:59

The words

Sanctimonious and needle went through my mind.

No it wasn't needle. Oh what was that other word that went through my mind?

Thanks (3)
avatar
By User deleted
28th Jan 2013 13:19

Just like watching the real thing

Although very, very funny there was also something slightly uncomfortable in watching Basil Fawlty's incoherent ramblings dig him ever deeper into the hole. Perhaps it was that sense of dread wondering what he would say or do next that could possibly make matters worse - yet he always managed to find a way.

The resemblance is uncanny.

Thanks (1)
The triggle is a distant cousin of the squonk (pictured)
By Triggle
28th Jan 2013 13:26

Dont mention the GAAR. I mentioned it once but I got away with it.

Thanks (1)
By George Attazder
28th Jan 2013 13:28

I used to enjoy...

... the way they rearranged the letter of Fawlty Towers for each episode.

My favourite was Flowery [***].  The significance of which occurred to me just today!

Thanks (2)
avatar
By User deleted
28th Jan 2013 15:56

I'm beginning to wonder ...

... whether "Manuel..." would not have been a more appropriate pseudonym.

Thanks (1)
avatar
By blok
29th Jan 2013 08:15

.

you got nothing better to do?

Thanks (2)
avatar
By thomas34
29th Jan 2013 08:22

Better watch this one Moderator

What an arrogant individual. For someone who has only been a member for a day or two, his second post achieved unsurpassed heights of rudeness. "I despair" (twice), "Oh Dear" (three times), "Basic Stuff" (twice), not knowing whether the OP was an accountant or a layman doing his own return, and so on.

So Euan may have missed something on this occasion - so what? He's been a valued member for nearly 8 years and posted around 5,500 times. You've got a lot of catching up to do Basil.

 

Thanks (2)
avatar
By User deleted
29th Jan 2013 08:25

One simple request

Justify, in 10 words or fewer, this categorical and unqualified statement of yours:

He has NOT made a taxable profit as an individual at all

And once you've admitted that you can't, explain why you consider George to be wrong but you to be correct.

Thanks (1)
By George Attazder
29th Jan 2013 09:36

@Basil

Yes. Sorry, you were right all along. NFO.

Thanks (0)
Euan's picture
By Euan MacLennan
29th Jan 2013 09:53

@Thomas

Thank you for the back-handed compliment, but I am not sure what you think I have missed.  I accept that my observation that it would be easier to transfer the goods into the business at cost, whilst not untrue, would not have been in accordance with the rules in s.172C ITTOIA 2005, with which I was unfamiliar, but I stand by my response to Basil's initial reply:

"So, if the client receives goods for nothing and then transfers them to his business at market value, hasn't he made a taxable profit as an individual which should be disclosed on his tax return along with his (reduced) business profits?"

It seems that BKD agrees with me.

Thanks (1)
avatar
By thomas34
29th Jan 2013 10:38

Storm in a Teacup

Euan - it's no big deal. I actually agree with the first paragraph of Basil's second post - I just object most strongly to the way he presented it.

If we assume that the first donor had been in business and his closing stock included the now famed goods, HMG would have received tax on this closing stock having some value. We've all had to carry out final capital allowance computations where a proprietor overnight takes ownership of (particularly) fixed assets and we attempt to put a market value on these assets.

If the donee (at this point not in business) starts with a NIL acquisition cost HMG will hypothetically receive tax twice on the same goods as soon as they're disposed of (in this case by giving them to his new business). Without somebody pettifogging about change in value of these goods between acquisition by gift and disposal into a trading business, I believe there's no taxable profit, either income tax or capital gain.

If I'm wrong, I'll put my hands up and say so but I won't be using capital letters to respond, or try to worm my way out of it by some other method.

 

 

 

Thanks (0)
By George Attazder
29th Jan 2013 11:17

Pettifogging

Nice word Thomas. Thank you.

Yes. Basil's underlying point, that he claims everybody else missed, is that when the individual acquires the goods by gift, his base cost isn't nil, but the market value at the time.

When the goods are transferred from the individual's personal account to business stock, that transfer is made at the market value at that time, and any gain or loss (the movement in value between original gift and transfer to the business) is a CGT matter, although quite probably irrelevant (depending on values), because of the chattels exemption.

Now let me pettifog a little.

Had the original donor been liable to IHT on the transfer of the goods to the individual, a holdover election would have been possible, and the individual's effective base cost would, indeed have been nil, as you suggest.

A point that the clever Basis has omitted to mention! :)

Thanks (1)
By Steve Holloway
29th Jan 2013 10:58

I always wonder about such people on this forum ...

that they could attract (let alone retain) clients is impossible to imagine. All I am left with is the image of someone sitting at their PC in their underpants with a rapier like tax mind and a tin of Special Brew for company.

Thanks (2)
avatar
By Stephen M
29th Jan 2013 19:03

Thanks

I should like to thank all contributors for any constructive comments made. I am reassured that the guidance given accords with my accounting treatment. On the other hand I can't believe that my question raised such a response. I will certainly think twice before I post anything else.

Thanks (0)
avatar
By User deleted
29th Jan 2013 20:25

@Stephen

You are quite corrrect, Stephen. There was no need for the nonsense - to which I will accept that I contributed - in response to what was a relatively straightforward question. In my view it could have all been avoided had someone chosen not to contribute in a particularly arrogant and condescending manner at 14:05 on Saturday 26th.

I think you will find that, generally, folks here welcome new members and their questions. Don't let the antics of a few put you off :)

Thanks (1)
avatar
By User deleted
30th Jan 2013 09:14

More words from Basil ....

... and even less said.

You did not answer my question. You stated categorically that there was no gain. I asked you to clarify how you managed to reach that definitive conclsion, and you have not done so.

Whether or not someone agrees with you is irrelevant - it is your explanation that I want to hear.

And actually thomas34 'agrees' with you only if one assumes that there has been no change in value between gift and transfer. So he has done the right thing and stated his assumption. There was no assumption in your statement, so again - how did you reach the conclusion that there had been no gain?

And I stand by my comment above - if you had not been so arrogant and condescending towards others, this thread would never have kicked off in the way that it did.

the fact that not one contributor has shown any error in the figures in that example signifies the correctness of my answers

That is one way of looking at it, and one to which you're perfectly entitled. An alternative, equally valid, interpretation might be that because no-one has agreed with your figures then they are wrong (for the avoidance of doubt, I'm not saying that they are wrong. I'm not syaing that they're correct either).

Likewise with your comment that started all this nonsense - the OP did not say there had been a gain, so one might assume that there had been none. By the same token, he did not say that there had been no gain, so it would be equally valid to assume that there had been a gain (as I stated earlier, I believe that to be the more likely scenario, though it remains nothing more than an assumption). For the last time, therefore - since the OP was silent on the matter, and you have not stated any assumption, how did you conclude that there had definitely been no gain - a point that you emphasised, and unambiguously repeated later in the thread?

Thanks (1)
By George Attazder
30th Jan 2013 08:20

Now here's an interesting...

... question.

Thanks (1)
avatar
By User deleted
31st Jan 2013 12:35

Typical

It is a well-known device of the person that has lost the argument, when asked to answer a question, to respond by saying that he has already answered it and asking the other party to re-read the thread to try and find the answer. I have better things to do than wade through screeds of garbage in the vain hope that I may find something of interest. If you won't provide a direct answer to what is a simple question, then at least point to the comment(s) where you think you already answered it. Otherwise your refusal will be taken as a concession  that you can't answer it.

As for my 'convoluted theories' - they're nothing more than simple logic. If you're unable to fathom it, it goes a long way to explain your incoherent ramblings (and, perhaps, why you mistakenly think that you may have answered my question).

So - if you continue to refuse to answer the question, we will indeed have to agree to disagree. You say that you have answered the question, I say that you haven't. Readers can decide for themselves who is correct.

Thanks (1)
By George Attazder
31st Jan 2013 07:59

@Basil

You NEVER had anything to add.

Thanks (1)
avatar
By User deleted
01st Feb 2013 10:49

QED

If you elect to allege ( wrongly) yet again that I have not answered your question, I hereby refute it in advance

Prove it then. Repeatedly saying that you have done something doesn't make it so. I can't prove a negative (though the 'proof' is there for all to see, in the lack of any answer), so the onus is on you to prove that you did answer the question. Every time you refuse to do so just makes it all the more obvious that you can't. So until you can demonstrate that you did answer the question, you will be considered not to have done so. QED. (But you'd better hurry  - this thread will be locked soon, much I am sure to everyone else's relief.)

And your last post just further confirms that George's opinion is in fact 'correct'. (In my opinion). And that is the point - it is George's opinion that you have never had anything to add. As such, however much you may disagree with that opinion, it cannot be 'incorrect'. A further illustration, therefore, of your muddled thinking that has confused you into believing (erroneously) that you answered my question.

Thanks (1)
avatar
By Henry Osadzinski
01st Feb 2013 11:08

Thread Closed

Sorry folks but due to the level of off-topic and inappropriate argument, this thread is now closed. Please remember to respect the author's original post and our community rules when it comes to keeping discussions polite and professional.

Thanks (3)