If you are in the process of finalising your end of financial year accounts and calculating your tax position, keep in mind any tax options that are available to you which can save you tax.
One of these options impacts the valuation of your trading stock. If stock is a material asset in your business then you should most certainly consider it.
This option provides you with different valuation methods that can be applied to your trading stock.
The majority of businesses value their trading stock at cost and in many cases this is the right valuation approach. However, the Tax Act gives you the choice of valuing your stock at the lower end of cost, market or replacement value.
Your trading stock is an asset that is recorded on your balance sheet. In most cases it should be tax neutral for you.
The cost of purchasing the stock is expensed in your profit and loss account and this is offset by the value of the stock asset, until you sell it.
So while the amount of stock you are carrying will impact your cash position, because you have your funds tied up in it, there is no direct impact on your profits or taxable income until you sell that stock.
However, if at June 30 some of your stock is worth less than its cost price you do have the option to value it at the lower figure and take the tax write off now, rather than wait until the stock is sold.
This reduction in your stock value will produce a tax saving for you.
There are a range of reasons why stock values may be less now than at the time when you purchased the stock.
This can occur where stock becomes out of date, obsolete, damaged or changes in demand mean that the stock can only be realised at a discounted price.
Every day we see business offering some of their stock at substantial discounts – some below cost. Other than when you sell your stock, your tax return gives you a once a year opportunity to adjust your stock values and realise on any losses.
These valuation options with your trading stock can be taken on an item by item basis. You don’t have to use the same valuation method for all of your stock.
You can elect to use different methods for different stock items. In many cases cost price will be the appropriate valuation method.
You would normally consider using market value or replacement value for stock items only where there has been a fall in value.
It will be important to have sufficient documentation to both record what action you have taken and also to justify the value you have arrived at.
If you are subject to a tax audit you will need to be able to substantiate the value being used. This means having your stock count and also the itemised values for each stock item.
Where the value being used is other than cost price there should be a clear basis for the amount used.
Where you have had any fall in stock values it normally makes sense to take the tax write-off now. We all know that cash is king at the moment and the tax saving will help to cushion some of the loss in your stock value.
Greg Hayes is a director of Hayes Knight and specialises in taxation and business planning advice.