BIM33630 - Stock: non-trading transactions in stock: ‘own goods’: Sharkey v Wernher principle

The decisions in the House of Lords in Sharkey v Wernher [1955] 36TC275, established the principle that where a trader takes stock from his business for private use or for use in another business which he owns, or where he transfers to his business stock which he owns in some other capacity than that of proprietor of that business, the transfer should be dealt with for taxation purposes as if it were a sale or purchase at market value. Thus, goods that a trader takes from his trading stock, for example, for the personal use and enjoyment of himself and members of his household, should be credited at market value. This principle has now been enshrined in legislation under ITTOIA05/S172A-F for income tax and FA08/Sch15/Part 2 for Corporation Tax. In brief, any disposal of trading stock not made in the course of the trade should be dealt with for taxation purposes as if it were a sale at market value. If there is a clash with the transfer pricing legislation (ICTA88/S28AA) the transfer pricing legislation takes precedence (ITTOIA05/S172F, FA08/Sch15/S10). Where a trader in the course of trade gives special terms, ‘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 decision and the subsequent legislation does not apply to:

services rendered to the trader personally or to his household, the costs of which should be disallowed in accordance with ITTOIA05/S34(1)(a);
the value of meals provided for proprietors of hotels, boarding houses, restaurants etc and members of their families, which should also be dealt with on the basis that ITTOIA05/S34(1)(a) applies;
expenditure incurred by a trader on the construction of an asset that is intended from the outset to be used as a fixed asset in the trade.

In all these cases only the costs in question should be disallowed.