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HMRC internal manual

Business Income Manual

Stock: trading transactions in: costs of acquisition of stock when the trader does not pay market value

The courts are reluctant to interfere with a commercial bargain even where the parties are connected in some way. There are three situations where market value may be substituted:

  • in the case of an `illusory or colourable or fraudulent transactions’, see comments in Craddock v Zevo Finance Co Ltd [1946] 27TC at page 290. `Colourable’ is explained as `a fancy price having no relationship to the real value’, page 292,
  • where the transaction is not entered into as a commercial transaction, see BIM33600 onwards,
  • where the stock is acquired from a discontinuing business, see BIM33450 onwards.

Purchase at undervalue - Jacgilden (Weston Hall) Ltd v Castle [1969] 45TC685

The property investment company acquired a property for £72,000 in a transaction arranged by its managing shareholder. Shortly afterwards the company sold the cleared site for £155,000. The company claimed to bring in the market value of £150,000 as the cost of the property, rather than the £72,000 it paid. It was arguing that it acquired the property partly as a gift from the managing shareholder. Plowman J considered the decided cases where a stock disposal was otherwise than by way of trade, but distinguished them on the basis that the transaction in Jacgilden was a commercial trading transaction. That being so he upheld the decision of the Special Commissioners that the acquisition was a commercial acquisition and the proper amount to be debited in respect of the property was its cost, £72,000.

So where stock is purchased at below market value in a commercial transaction then the acquisition value is the amount paid, unless Pt 3 Ch 11 Corporation Tax Act 2009 applies, see BIM33560.