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HMRC internal manual

Enquiry Manual

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HM Revenue & Customs
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Recalculating Profits: Business Models: Own Goods Adjustments

Traders often take goods from their business for themselves or for family and friends without paying. This will depress the gross profit margin.

When reconstructing a business economics model it is important to know whether the trader took goods for themselves and if so how these have been accounted for in arriving at the figure in the return.

In its simplest form there are three possible ways to deal with own goods in a retail trade.

  1. Where goods are taken from business stock, the value of the goods at their full retail price can be reflected in the total sales/business income (turnover box) in the SA return.

In this scenario, turnover per the mark up exercise, on the cost of sales, should be directly comparable with that shown on the Return and if the mark up figure is higher there are additional profits.

  1. Where the taxpayer has purchased own goods through the business, but these are not items of business stock, the cost of sales figure should have been be adjusted accordingly and the figure for own goods reflected in the disallowable expense box on the return.

In this scenario, a mark up exercise on the net costs of sales (i.e. after deducting own goods) should again give a turnover figure directly comparable with that shown on the return and if the mark up figure is higher there are additional profits.

  1. Goods taken for personal use (apart from those shown in disallowable expenses) that increase profit can be shown in the tax adjustment to net profit or loss section of the return.

In this scenario, a mark up exercise on the costs of sales should be directly comparable to the turnover plus goods taken for personal use shown on the Return and if the mark up figure is higher there are additional profits.

You could of course have a combination of scenario 2 and 3.

In all circumstance you should satisfy yourself that the figures are in fact correct.

Care is also needed in dealing with adjustments for contra accounts EM2732.