Using a stock-take to cut the company tax bill

Valuation of stock

It’s not just the number of items and how much a company paid for them that determines the stock value for the annual accounts, there’s a particular valuation rule. In this respect HMRC follows accounting principles and these say that stock must be valued at the lower of:

• cost - this is the price paid for the item plus other expenses incurred in bringing it to its current location, namely transport costs; and
• net realisable value - this is the price the company estimates the items can be sold for less any transport costs needed to complete the sale.

A company is permitted to make a realistic value of stock in hand. If they think that items will need to be discounted in order for them to sell, advise them to revalue them if this will take the price below the initial cost.

Example. In the year to 31 July 2020 Acom Ltd, a wholesale business, spent £21 per unit on a line of summer goods. These didn’t sell well, so Acom marketed them again in the year to 31 July 2021 at a reduced price of £25 each, i.e. still above cost price. They didn’t sell any items and now with its financial year about to end Acom still has 500 units on hand. The sales director decides to offer them to customers for just £10 each to try to get rid of them. Acom must revalue this stock for its July 2021 accounts at 500 x £10 = £5,000. This compares to the £10,500 cost amount included in the 2020 accounts. Acom can claim a tax deduction for the £5,500 drop in value.

Other opportunities

In the example above, the need for revaluation was relatively obvious. But companies can also check their stock for items that are damaged or faulty, but still capable of being sold. Even some damaged packaging can mean a discount is required. Often these items go unnoticed as staff will avoid selling them.

Companies should make their staff aware that they should record all items of damaged stock when they find them. They can then revalue these at the year end. They can also compare last year’s stock report with this year’s. If they identify items they know can’t be sold, the company can scrap them or give them to customers as a free giveaway. This won’t usually trigger any tax consequences other than reducing the value of stock for accounting and tax purposes.

Write off the right way

Companies are not allowed to take a generic approach to revaluation. For example, they can’t adjust down the value of stock because year on year they know they will have 5% wastage. The key to tax deductions for devalued stock is to have a thorough stock-take procedure and well-informed staff.