How do I account for goods taken from stock for personal use?

Question

Accepted Answer

Here is a comprehensive answer covering both the **direct tax** (Income Tax/Corporation Tax) and **VAT** treatment of goods taken from stock for personal use.

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## What the law says

### Direct Tax (Income Tax / Corporation Tax)

When trading stock is disposed of **otherwise than in the course of trade** (e.g. taken for personal use), the open market value of the stock at the time of disposal must be brought into account as a trading receipt, and any actual consideration received is left out of account. The deemed receipt is treated as arising on the date of disposal.

This rule is found in **s.172D ITTOIA 2005** (for Income Tax) and the equivalent provisions in **ss.156–161 CTA 2009** (for Corporation Tax).

The definition of "trading stock" for these purposes covers anything sold (or that would be sold) in the ordinary course of trade, but **excludes** materials used in manufacture, services performed in the ordinary course of trade, and articles produced in the performance of such services.

**Exception – Cash Basis:** For businesses using the cash basis, there is **no** requirement to bring in the value of goods taken for personal use as a receipt. Instead, a just and reasonable adjustment should be made — for example, disallowing the cost of those goods as an expense.

### VAT

The **permanent** transfer of business assets (including stock items) to private use is treated as a **deemed supply of goods** under **VAT Act 1994, Schedule 4, paragraph 5(1)**, and output tax is due. This applies where VAT on the goods (or their component parts) was wholly or partly deductible.

The purpose of this deeming provision is to prevent goods being enjoyed tax-free by the final consumer where input tax has already been reclaimed.

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## HMRC guidance / practice

### Direct Tax – How to account for it on the SA Return

HMRC identifies **three acceptable methods** for reflecting goods taken from stock in a Self Assessment return:

1. **Include at full retail price in turnover**: The value of goods taken is reflected in the total sales/business income (turnover) box. A mark-up exercise on cost of sales should then be directly comparable to the turnover figure on the return.

2. **Adjust cost of sales and show in disallowable expenses**: Where the goods are not items of business stock (e.g. purchased through the business for personal use), the cost of sales figure is adjusted and the value of own goods is shown in the **disallowable expenses** box. A mark-up on the net cost of sales should then match the turnover figure.

3. **Show in the tax adjustment to net profit or loss**: Goods taken for personal use (not already shown in disallowable expenses) that increase profit can be shown in the **tax adjustment to net profit or loss** section of the return. A mark-up on cost of sales should then be comparable to turnover plus goods taken for personal use.

A combination of methods 2 and 3 is also possible.

### Direct Tax – The market value principle

The market value rule originates from the House of Lords decision in **Sharkey v Wernher [1955] 36 TC 275** and has since been enshrined in statute. Where a trader gives special terms in the ordinary course of trade, "market value" may be taken as the **lowest price at which he sells the goods in comparable quantities** in the ordinary course of trade.

The market value rule does **not** apply to:
- Services rendered to the trader personally or to their household (costs should be disallowed under s.34(1)(a) ITTOIA 2005);
- Meals provided for proprietors of hotels, boarding houses, restaurants etc. and their families (also dealt with under s.34(1)(a) ITTOIA 2005);
- Expenditure on constructing an asset intended from the outset to be a fixed asset in the trade.

### VAT – What goods are covered

Goods on which you must account for VAT when taken permanently for private use include: items from stock you would normally sell, goods your business makes or produces, materials used to make things, business supplies (e.g. office supplies), and business assets (e.g. computers, tools and machinery). Private use includes use by you or someone else you give the goods to.

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## Summary

| Scenario | Direct Tax Treatment | VAT Treatment |
|---|---|---|
| **Accruals basis** | Credit trading profits with **market value** of goods taken (s.172D ITTOIA 2005 / CTA 2009 equivalent) | Account for output tax as a deemed supply (VAT Act 1994, Sch 4, para 5(1)) |
| **Cash basis** | No receipt required; make a **just and reasonable adjustment** (e.g. disallow the cost) | Same VAT treatment applies |

Scenario	Direct Tax Treatment	VAT Treatment
Accruals basis	Credit trading profits with market value of goods taken (s.172D ITTOIA 2005 / CTA 2009 equivalent)	Account for output tax as a deemed supply (VAT Act 1994, Sch 4, para 5(1))
Cash basis	No receipt required; make a just and reasonable adjustment (e.g. disallow the cost)	Same VAT treatment applies