Stock and work in progress

By Tolley

The following Corporation Tax guidance note by Tolley provides comprehensive and up to date tax information covering:

  • Stock and work in progress
  • Valuation of stock
  • Stock adjustments on cessation or transfer of trade
  • Stock transfers between connected UK traders ― s 167 elections
  • Stock adjustments ― summary
  • Recognition of work in progress (WIP)
  • Appropriations from trading stock
  • Appropriations to trading stock

Valuation of stock

For tax purposes, stock is valued at the end of an accounting period at the lower of cost or ‘net realisable value’.

Cost is normally determined on a ‘first in / first out basis’ (FIFO). This means that the older stock is always deemed to be sold first, which leaves the newer stock in hand at the year-end.

The ‘net realisable value’ is the sale price less costs to completion. Normally ‘net realisable value’ will be higher than cost, but in some cases it may produce a lower figure, which must be used.

Generally, no adjustment will be required to the figures in accounts prepared under GAAP because this basis should be accepted by HMRC. FRS 102, s 13 (‘Inventories’) sets out the definition of inventories and the basis of valuation required under UK GAAP. The IAS equivalent is IAS 2 (‘Inventories’). The principle under IAS is essentially the same as under FRS 102. The position is also broadly the same as it was under the ‘old’ UK GAAP equivalent, SSAP 9, ss 18 and 20.

Under FRS 102, inventories should be valued at the lower of cost and the estimated selling price, less completion and selling costs. Where inventories are held for distribution for nominal or no consideration, they shall be measured at cost, adjusted where applicable for any loss of service potential.

In arriving at cost, the following elements are included:

  • cost of purchase ― this includes the purchase price, transport costs, handling costs and any taxes paid on purchase
  • cost of conversion ― this includes direct costs such as staff and direct expenses, production overheads including depreciation and any other overheads attributable to bringing the inventories into its current location and condition

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