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HMRC internal manual

Business Income Manual

Stock: trading transactions in: cost of acquisition of stock when there is a non-cash payment

Stock may be acquired in a barter transaction. It can be paid for using an asset(s) or by the company issuing its own shares as consideration.

  • Where stock is acquired in a commercial bargain the cost of the stock is the value the parties put on the consideration given for the stock.
  • Where the consideration given by a company is the issue of its own shares the cost of stock must be at least equal to the par value of the shares.
  • If the transaction is colourable, illusory or fraudulent then the cost of stock may be its market value, but see BIM33330.

Company issues shares as consideration for stock

Where, in a commercial bargain, a company issues fully paid shares to acquire stock the minimum consideration paid for that stock for tax purposes will be at least equal to the par value of the shares. It may be more if it is considered that the shares are issued at a premium.

Osborne v Steel Barrel Co Ltd [1942] 24TC293

It is difficult to put this case into present day context. Nowadays the accounting would have been governed by modern accounting standards with goodwill being recognised on the acquisition of a business. In addition, Pt3 Ch11 Corporation Tax Act 2009 now governs the value of stock to be used when stock is transferred on the discontinuance of a business.

The facts were complex, and the company acquired the assets of a business in a transaction with a connected party, its managing director and majority shareholder. The company paid cash and issued its own shares as consideration for the assets of another business. The question considered by the courts was the correct acquisition cost of the stock acquired in that bargain. The decision was that the consideration given was the cash plus at least the par value of the shares, and that, as there was no suggestion that the company had paid less than the value of the assets acquired, the cost of the stock was the same as its value.

The value decided by the Commissioners was neither the value in the accounts nor the market value argued for by the managing director.

Lord Greene MR made clear that shares cannot be issued at a discount, so where fully paid shares are issued for a consideration other that cash the consideration moving from the company must be at least equal in value to the par value of the shares.

Craddock v Zevo Finance Co Ltd [1946] 27TC267

The company was formed to take over the more speculative investments of another investment dealing company. The company issued shares as fully paid in part consideration for the acquisition of a holding of shares from that other company. The investments were purchased at their book value in the first company’s accounts and were then shown in the accounts of Zevo Finance Co Ltd at that same value. The value of the investments had fallen while the first company held them and their market value was considerably less than this book value.

The judgements relied on the principle that shares cannot be issued at a discount and that therefore the consideration paid was the par value of the shares plus the face value of a debenture. The cost of the stock was the value of the consideration paid. The judges also examined whether the transactions were in any way colourable, illusory or fraudulent, finding that the transactions took place as part of an ordinary scheme of reconstruction.

Market value can only be substituted for the terms of a contract when transactions are colourable, illusory or fraudulent.

In the Steel Barrel and Zevo Finance cases the judges were looking at the amount of the consideration given by the companies for the stock to ascertain the cost of the stock. They were not looking at the expenditure incurred by the company but at what had passed from the company.

Stanton v Drayton Commercial Investment Co Ltd [1982] 55TC286

This case was a capital gains tax case where the point at issue was the value of the consideration given by the company and not the cost of the consideration to the company. The earlier cases are examined in detail in the judgements. This case confirmed that in genuine arm’s length transaction on commercial terms the value of the consideration given is the price agreed by the two parties.