BIM33495 - Stock: valuation on discontinuance of business: meanings

SS162, 163, 166-168 Corporation Tax Act (CTA 2009) and SS174, 175, 177-179 Income Tax (Trading and Other Income) Act 2005 (ITTOIA 2005)

Trading stock (S163(1) CTA 2009 and S174(1) ITTOIA 2005)

Trading stock is defined very widely. It can be land or other property and includes:

  • anything which would be sold in the course of that trade, whether it is complete or unfinished,
  • any material which would be used in the manufacture, preparation or construction of any of that trading stock,
  • any services for which it is reasonable to expect that a charge would be made if there were no cessation (or in the case of partly completed services, a charge would be made on their completion),
  • any article produced, or material used in the performance of such services..

Top of page

Connected person (S168 CTA 2009 and S179 ITTOIA 2005)

The predecessor and successor are connected if:

  • they are connected within the meaning of S1122 Corporation Tax Act 2010 or S993 Income Tax Act 2007 (as appropriate) - which gives general rules defining connected persons, including family members and the control tests for companies,

or

  • one is a firm and the other has the right to a share of the assets or income of the firm,

or

  • one is a body corporate and the other has control over it,

or

  • both are firms and some other person has the right to a share of the assets or income of both of them,

or

  • both are bodies corporate, or one is a firm and the other is a body corporate, and some other person has control over both of them.

Top of page

Arm’s length price (S166(2) CTA 2009 and S177(2) ITTOIA 2005)

The legislation takes the value to be the amount which would have been realised if the sale had been between independent persons dealing at arm’s length. For example, where a wholesaler sells stock in bulk to another wholesaler it imposes the wholesale price rather than the sum of the retail prices that could have been obtained for smaller lots.

In arriving at an arm’s length value all the stock transferred to the purchaser has to be considered as a whole.

Top of page

Acquisition value (S167(5) CTA 2009 and S178(5) ITTOIA 2005)

Acquisition value is defined in terms of the amount that would have been deductible for tax purposes, in computing the profits or gains of the discontinued trade on the sale of the stock.

For traders whose stock valuation for tax follows generally accepted accountancy practice, `acquisition value’ as defined will be the lower of cost and net realisable value. In other words acquisition value will equal the value that would have been deducted in a sale if the trade had not ceased. It is equal to the stocks’ book value.

It is provided that the period for which the profits or gains are computed is treated as if it began immediately before the sale. This ensures that the acquisition value recognises any fall in value of stock in the period immediately before discontinuance. For instance in the absence of this provision, for stock acquired in that period its acquisition value would be the stock’s cost and not its, lower, net realisable value. This rule therefore triggers a valuation of such stock at its net realisable value just before the sale.

Where stock is sold after the accounting date but before the accounts are drawn up, accounting practice requires that the actual sale proceeds should be taken into account in arriving at the net realisable value of stock. If stock was in fact sold at a grossly undervalued price it could be argued that the valuation (see the previous sub-paragraph) should be equal to that net realisable value. By fixing the price of the stock in the postulated sale at arm’s length value the legislation forestalls this contention.

Top of page

The price received (S162(1) CTA 2009 and S175(2) ITTOIA 2005)

The price received for the stock is the amount that was realised on sale, or the value of the consideration given for the transfer, see BIM33485.