Stock (inventories) and work in progress

By Tolley

The following Owner-Managed Businesses guidance note by Tolley provides comprehensive and up to date tax information covering:

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

Valuation of stock

For tax purposes, stocks or inventories (as it is called under FRS 102 and IAS) are generally valued at the end of an accounting period at the lower of cost or ‘net realisable value’.

Businesses may also be able to value stock on the market to market basis, with stock being valued at market value. However, this tends to only be used by financial institutions and commodities dealers. It is typically only appropriate where there is a liquid market in the stock, so that the value can be easily realised, and easily valued. HMRC will accept this as a basis, provided that movements in the value of stock are made via the profit and loss account, rather than through movement in reserves.


Cost is normally determined on a ‘first in first out basis’ ― this means 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 since this 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

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