Inventory - Tax Liability Q

[Ham_and_Jam]

I have a small business as a partnership (not ltd).

Last year we held a bit more stock than normal (approx £5k more) which I’m sure pushed up our tax bill on our end of year accounts.

This year we are both looking to be very close to the higher 40% tax bands and want to mitigate this by various options. In doing the calculations, I notice our stock level is back to normal levels, so £5k less in the tax year. Will this £5k be taken into account when calculating our profit / tax bill?

[trickywoo]

Ham_and_Jam said:

I have a small business as a partnership (not ltd).

Last year we held a bit more stock than normal (approx £5k more) which I m sure pushed up our tax bill on our end of year accounts.

This year we are both looking to be very close to the higher 40% tax bands and want to mitigate this by various options. In doing the calculations, I notice our stock level is back to normal levels, so £5k less in the tax year. Will this £5k be taken into account when calculating our profit / tax bill?

Stock is usually an asset not a profit / loss item. You have paid something for it after all. In theory if you’ve sold £5k more of stock than normal your tax bill will go up and not down as presumably you sold it for more than you paid.

[Ham_and_Jam]

trickywoo said:

Stock is usually an asset not a profit / loss item. You have paid something for it after all. In theory if you ve sold £5k more of stock than normal your tax bill will go up and not down as presumably you sold it for more than you paid.

Im pretty sure my tax bill went up last year after I sent my accountant a stock take value which was £5k higher than he had recorded.

I’ll have another proper look.

[2 sMoKiN bArReLs]

Ham_and_Jam said:

trickywoo said:

Stock is usually an asset not a profit / loss item. You have paid something for it after all. In theory if you ve sold £5k more of stock than normal your tax bill will go up and not down as presumably you sold it for more than you paid.

Im pretty sure my tax bill went up last year after I sent my accountant a stock take value which was £5k higher than he had recorded.

I ll have another proper look.

That is quite possible if it was an adjustment.

If the stock went up the amount charged as a cost of sales may have gone down. This would have lead to a higher GP, and higher net profit making more tax. Possibly...

[Ham_and_Jam]

trickywoo said:

Stock is usually an asset not a profit / loss item. You have paid something for it after all. In theory if you ve sold £5k more of stock than normal your tax bill will go up and not down as presumably you sold it for more than you paid.

Obviously my tax bill goes up because the stock had been sold at a profit. Agreed.

But purely for theoretical purposes- if all other factors are kept the same, if you record the stock as £10k or £5k will my tax bill go down at the lower level? How is that recorded.

Im only asking so I can make sure what my final earnings will be, I want to make sure I get below the threshold for higher earnings. That might be to shift more in to pensions etc.

[Panamax]

If you've been increasing the vale of "stock" there are very real questions to be asked about why you were doing it.

Q1. Are you planning to sell the business?

[Ham_and_Jam]

Panamax said:

If you've been increasing the vale of "stock" there are very real questions to be asked about why you were doing it.

Q1. Are you planning to sell the business?

Err..no.

Not really sure what you mean by real questions ..

We became very busy. We are a business that holds short shelf life food products (<2-3 weeks). In order to meet demand we simply held more stock. We didn t increase the value of the same amount of stock. There was probably a 20% uplift in general food inflation which also increased the values from the previous year.

Likewise, we are not devaluing the stock now. We will report the value of stock after a stock take. I know visually looking at our current stock levels we will tough back to our normal levels.

I know what our P&L is now and just wondering what effect the reduction in stock level will have, if any to our tax bill. Thats it.

[AndyAudi]

Ham_and_Jam said:

I know what our P&L is.

If you haven’t adjusted for stock yet , you don’t know your P&L.


In the simplest of terms

Sales - cost of sales = profit

your cost of sales is
Opening Stock + purchases - closing stock

(Your opening stock will be your closing stock from last year)

I’m guessing the point you are at is
This years sales - purchases (which prob is the correct cash-flow). You should adjust for the stock levels too in the way shown above. Which,
If you reduce inventory will Dr (increase) your cost of sales & Cr (decrease) your Asset that was inventory. The increased cost of sales will reduce the taxable profit.

In your line with perishable items it makes more sense to let the accounting follow the happenings of the stock, you will have physically used the last years inventory 1sr & the stuff you have in stock now is probably the last stuff you bought

[Panamax]

Ham_and_Jam said:

We didn't increase the value of the same amount of stock. In order to meet demand we simply held more stock.

Ok, that's a lot clearer. It's not at all obvious to me why that would, in itself, increase your taxable profit.

[Ham_and_Jam]

Panamax said:

Ok, that's a lot clearer. It's not at all obvious to me why that would, in itself, increase your taxable profit.

Yeah that was the crux of my question.

We do our book keeping on desktop QB. We’re never more than a week behind, as we like to keep a finger on the pulse.

We submit these to our accountant for year end and they produce our full P&L and SA submissions.

This year after we received the books for our approval, I requested the inventory be increased by c£5k to reflect a recent stock take.

This then increased our SA payments by about £2k.

We dont normally submit inventory valuations as they have been pretty small and relatively stable, and our accountant has always used the previous years figure.

The question was now it has reverted will my tax liability be reduced this year.

I can see what it is now on QB but we don’t or have never used inventory in QB. Its just added by our accountant

[AndyAudi]

Ham_and_Jam said:

The question was now it has reverted will my tax liability be reduced this year.

I can see what it is now on QB but we don t or have never used inventory in QB. Its just added by our accountant

If your accountsnt reduces your leftover inventory figure yes that will reduce your profit to account for it being consumed & a cost added .
Reduced profit will result in less tax payable.

Some might be tempted not to correct it if they were paying pension contributions anyway that would take them back to basic and keep it as a buffer for future

[Panamax]

Ham_and_Jam said:

Panamax said:

Ok, that's a lot clearer. It's not at all obvious to me why that would, in itself, increase your taxable profit.

Yeah that was the crux of my question.

We don't normally submit inventory valuations as they have been pretty small and relatively stable, and our accountant has always used the previous years figure.

Now I'm triply confused. You don't need a "valuation of stock" to know how much you've "paid for stock" in the year.

Question 2: How much do you pay your accountant each year?

[Countdown]

Panamax said:

Now I'm triply confused. You don't need a "valuation of stock" to know how much you've "paid for stock" in the year.

Sometimes you do if there has been pilferage / leakage / wastage.

[Ham_and_Jam]

Panamax said:

Now I'm triply confused. You don't need a "valuation of stock" to know how much you've "paid for stock" in the year.

Question 2: How much do you pay your accountant each year?

We know exactly how much we pay for stock.

Why would you do stock check if it wasnt to get a value of whats left in the business?

[Countdown]

Ham_and_Jam said:

Panamax said:

Now I'm triply confused. You don't need a "valuation of stock" to know how much you've "paid for stock" in the year.

Question 2: How much do you pay your accountant each year?

We know exactly how much we pay for stock.

Why would you do stock check if it wasnt to get a value of whats left in the business?

I think Panamax is saying you shouldn’t need to do a stocktake if you know what you’ve bought and what you’ve sold.

[2 GKC]

Countdown said:

I think Panamax is saying you shouldn t need to do a stocktake if you know what you ve bought and what you ve sold.

If it were that simple no one would ever need to do a stock take

[Ham_and_Jam]

Countdown said:

I think Panamax is saying you shouldn t need to do a stocktake if you know what you ve bought and what you ve sold.

That’s a very simplistic view.

Our business is very short shelf life food, thats both sold in its raw form or through added value conversion.

We wouldn’t be able to count widgets in, widgets out.

[Panamax]

Counting stock is different from revaluing stock.

Usually stock sits there at "cost" until it's either sold or needs to be written down because its value/likely selling price has reduced. If a stocktake shows it's been lost, nicked or whatever its value goes to zero (ignoring insurance).

Revaluing stock upwards would be unusual because it creates profit (which may be taxable) without generating any cash. Better to recognise profit as and when when sale takes place, the cash comes in and you've got some cash to pay the tax.

[Ham_and_Jam]

AndyAudi said:

If your accountsnt reduces your leftover inventory figure yes that will reduce your profit to account for it being consumed & a cost added .
Reduced profit will result in less tax payable.

Some might be tempted not to correct it if they were paying pension contributions anyway that would take them back to basic and keep it as a buffer for future

This appears to be the answer.

I ve just trawled through last years accounts and found that the accountant did indeed include an entry in the cost of sales by the amount of stock we had left at year end.

In effect that bumped our GP up by the same amount, and that rattled down to net profit and our tax liability.

Thankyou for you contributions.

[Ham_and_Jam]

2 sMoKiN bArReLs said:

That is quite possible if it was an adjustment.

If the stock went up the amount charged as a cost of sales may have gone down. This would have lead to a higher GP, and higher net profit making more tax. Possibly...

Correct. See post above