Beta This part of GOV.UK is being rebuilt – find out what this means

HMRC internal manual

VAT Valuation Manual

HM Revenue & Customs
, see all updates

Special valuation provisions: supplies of goods for no consideration - position prior to 1 August 1992

Before 1 August 1992, business goods or assets that were disposed of for no consideration were valued by reference to their original purchase price or production cost. Paragraph 7 of Schedule 4 to VATA 1983 had provided as follows:

  1. Where there is a supply of goods by virtue of -

(a) A Treasury order under section 3(5) of this Act; or

(b) Paragraph 5(1) of Schedule 2 to this Act (but otherwise than for a consideration); or

(c) Paragraph 7 of that Schedule, the value of the supply shall be taken to be the cost of the goods to the person making the supply except where paragraph 10 below applies.

Cost was taken to be:

  • the price, excluding VAT, paid for the goods by the trader, or
  • if the goods were manufactured by the trader, the cost of their manufacture including overheads. Cost therefore did not include profit but did include any incidental costs such as delivery or packaging costs.

The trader would be responsible for establishing the costs, usually from his purchase invoices, costing system or other records. In attributing the overheads, the trader’s method would have to be shown by him to be reasonable.

The valuation based on original cost was mitigated by extra-statutory concession A1, to allow for cases where the goods had depreciated between the times of their acquisition and disposal.

A1. Disposal of assets.

(a) On de-registration, unless the business is being transferred as a going concern, VAT must be accounted for on the cost of goods forming part of the assets of a business. The cost of any used equipment can be taken as its price if bought in its used state.

(b) If goods forming part of the assets of a business are disposed of for no consideration, so that they no longer form part of those assets, VAT must be accounted for on their cost. The cost of any used goods can be taken as their price if bought in their used state.

The concession therefore produced a value in respect of used goods that would be the same as that which one would arrive at under the current provision of paragraph 6 of Schedule 6 to VATA 1994. It was, however, confined to goods that had been “used”. Goods bought that had never been used in the business, still had to be valued at their original purchase price or production cost. This tended to arise most frequently where goods bought for resale could not be sold for some reason and were therefore still on hand when de-registration occurred. These goods were clearly not used because they had never been sold. Often traders in this situation would strongly dispute an assessment based on the original cost of the goods, contending that the value of the goods should be nil as evidenced by the fact that they were unsellable. The decisions of VAT Tribunals in the cases of Alexander McCormick (MAN/90/389) and Montessori Teachers Supplies Ltd (LON/91/2421Z) were sometimes cited to support this contention.

In McCormick, the trader had purchased a car-valeting product under a distributorship agreement. The business venture was unsuccessful and the Appellant ceased trading after only a few months. He had only sold a few items and given some away as promotions. When he ceased trading, he had about 300 unsold kits on hand. The VAT Office assessed on the cost price of the kits. The Appellant contended that the stock had no value at the time of de-registration because it was unsellable. The Tribunal upheld the Appellant’s claim.

In its decision, the Tribunal had found that the value of the deemed supply had to be based upon the value of the goods at the time of de-registration. It then accepted the Appellant’s evidence that the value at that time was nil. However, this decision was arrived at without the Tribunal’s attention having been drawn to the appropriate valuation provision in paragraph 7, Schedule 4 of VATA 1983. Had it been properly referred to that provision, the Tribunal should have concluded that the value of the self-supply was the original cost of the goods and that the extra-statutory concession was inapplicable.

In the later case of Montessori, the trader had been a supplier of educational materials but, at the time the VAT Office issued its assessment, it had gone into liquidation. While still trading, it had returned stock to two suppliers from whom it had originally been purchased for £10,312.23, in return for those creditors writing off that amount of debt. The assessment was for VAT on that sum on the basis that this was the value that the parties had placed on the returned goods. The Appellant argued that the returned stock had no value because it had been trying unsuccessfully to sell the goods for eleven months.

The Tribunal accepted the value attributed to the stock by the Appellant. The value attributed to it by the two creditors was unknown but the Tribunal considered that it would be surprising

“… if, after it had remained unsold for nearly a year, and knowing the market, they placed a value on it equivalent to its original purchase price, or, if there was a prospect of recovering the debts, they were willing to cancel these debts in return for receiving back material which had for so long failed to find a buyer.”

The Tribunal therefore found that the parties did not place a value on the goods equivalent to the cancellation of the debts and allowed the appeal.

This decision was another in which the Tribunal was not directed towards paragraph 7 of Schedule 4 to VATA 1983. However, it is unclear from the decision exactly what question was being addressed. It is possible that this was actually an attempt at valuing a “barter” under section 10(3), VATA 1983 - the return of the stock being a supply in return for the action of the debt being written off. This would explain why the Tribunal was considering the value attributed by both of the parties. It would also explain why there is no reference to a deemed supply under paragraph 5 of Schedule 2, VATA 1983 anywhere in the report. Even if the Tribunal had been addressing the question of valuing a deemed supply for no consideration, it should have applied paragraph 7 of Schedule 4 and not attempted a valuation based upon what the parties considered the supply to be worth.

A more recent case in this area is that of T.P.Rowledge (LON/93/237A) and is the case that you should cite in response to any trader contending for a nil valuation on the basis of McCormick or Montessori.

Mr Rowledge carried on business as a computer designer and software consultant until he de-registered in October 1991. At the time of de-registration he was in possession of 49 “Archimedes Smalltalk licences”. These were software packages that a company had given him in return for his services before it went into liquidation. It had issued him with a tax invoice that showed the price to be £540 per copy less 45% discount, making a total of £14,850 plus £2598.75 VAT, although no actual payment was required. Originally there were 50 “licenses”, but the Appellant had sold one for a sum greatly in excess of £540.

The VAT Office issued an assessment valuing the 49 “licenses” at the cost price that had been shown on the invoice. This was in keeping with paragraph 7, Schedule 4, VATA 1983. The Appellant claimed a nil valuation in reliance upon McCormick.

In the event, the Tribunal allowed the appeal on the grounds that the “licenses” were services rather than goods. However, the Chairman made it plain that, had the supplies been goods, paragraph 7 of Schedule 4 would have applied

“… The fact that the market value was apparently nil and that Mr Rowledge was unable even to give away other copies, is not material in view of the statutory provisions cited by Mr Keith (i.e. paragraph 7, Schedule 4) and which were not before the Tribunal in the Alexander McCormick case”.

You should cite Rowledge for support in cases where a trader contends that a nil valuation is applicable and relies upon McCormick or Montessori to support that claim.