BIM33110 - Stock: valuation: tax treatment of trading stock: Lord Nolan in Threlfall v Jones

Opening and closing stock in trading accounts

The tax case Whimster and Co. v CIR [1925] 12TC813, established that the correct way of computing trading profits for tax purposes was to bring in opening stock and closing stock into the computation at the lower of cost or market value (the modern rule being the lower of cost and net realisable value). This rule was discussed by Lord Nolan in Threlfall v Jones and Gallagher v Jones [1973] 66TC77, in the context of deciding when expenditure should be brought into account.

“Mr Glick QC for the Crown submitted that there is a well-established precedent for such a disallowance in the accountancy practice whereby unsold stock-in-trade is brought into account at the beginning and at the end of the period at the lower of cost or market value, a practice recognised and approved for tax purposes as long ago as 1925 in Whimster & Co v CIR 12TC813. The effect of this practice, said Mr Glick, is to disallow the deduction of the trader’s expenditure on the unsold stock (or so much of it as is represented by the market value, if lower) and carry it forward to be set against the price for which the stock is ultimately sold. That is certainly one way of describing the effect of the practice, and comes close to the language of Lord Reid in Ostime v Duple Motor Bodies Ltd [1961] 39TC537 1WLR739 at page 754, where speaking of stock-in-trade and work-in-progress, he said:

‘So the question is not what expenditure it is proper to leave in the account as attributable to goods sold during the year, but what expenditure it is proper, in effect, to exclude from the account by setting against it a figure representing stock-in-trade and work in progress.’

That is how he described the effect of the practice, but it is I think clear from the earlier part of his speech at pages 751-3, that as a matter of legal analysis he regarded the practice as involving the deduction of the whole of the expenses incurred during the period but the crediting against them of a closing figure for unsold stock and for work-in-progress as a notional receipt. Thus in the passage immediately preceding that which I have quoted he said at page 753:

‘It has long been established that you are entitled to include in expenditure for the year all business expenses in that year not excluded by the old rule 3, now section 137 of the Income Tax Act, 1952, whether or not they can be attributed to the production of goods in that year.’

In the same case Viscount Simonds and Lord Guest spoke in similar terms, and both used the word ‘receipt’ with reference to the closing figure for stock and work-in-progress see Viscount Simonds at page 749, and Lord Guest (quoting Rowlatt J in an earlier case) at page 759 and again at page 760”.

The rest of this chapter discusses valuation methods in detail.