BIM55410 - Farming: stock valuation: BEN 19
1) INTRODUCTION
1.1. This statement explains the basis of valuation of farm
stock at the end of periods of account which is acceptable to
Inspectors of Taxes. It has been prepared to assist farmers and
their professional advisers. It has been prepared after
consultation between the Inland Revenue, the Central Association of
Agricultural Valuers, the Institute of Chartered Accountants in
England and Wales, the Institute of Taxation, the Royal Institution
of Chartered Surveyors, the Country Landowners Association and the
NFU. It supersedes all previous arrangements made by the Inland
Revenue and the NFU. It does not affect rights of appeal in
individual cases.
1.2. Other methods of valuation may also be acceptable to
Inspectors of Taxes in particular cases provided they are
recognised by the accountancy profession as a whole as giving a
true and fair view of the results for the period concerned and do
not violate the taxing statutes as interpreted by the Courts.
1.3. A valuation which, although in form made on a recognised
basis, pays insufficient attention to the facts will not be
acceptable.
2.GENERAL PRINCIPLES
2.1. The reason for valuing stock at the end of an accounting
period is to identify and carry forward those costs which were
incurred before that date but will not give rise to income until a
later period. By carrying forward those costs they can be matched
with the income when it arises. Profit will be understated if stock
is not brought in.
2.2. However, if there is no reasonable expectation that the
proceeds from the sale of the stock in a future period will be
enough to cover the costs, then relief for the expected loss may be
obtained in the period for which the accounts are being prepared by
valuing the stock at what it is expected to realise when sold in
the normal course of trade.
2.3. For tax purposes we are looking for a figure (commonly
referred to as a valuation) which represents the cost, or, if
lower, the net realisable value of the stock.
2.4. In some circumstances there may be more than one
acceptable method of computing the value of stock but the basis of
valuation in a particular case should be consistent. If it is
decided to change the basis of valuation the Inspector of Taxes
should be advised when the accounts are submitted. The Revenue's
practice on changes of basis in valuation is set out in Statement
of practice SP3/90. [Note that SP3/90 is now obsolete but current
guidance can be found at
BIM33199] onwards.
2.5. Occasionally Inspectors discover that the stock figure
in the accounts is net of a provision (reserve), for example, for
dilapidation. If the creation of such a provision is considered
appropriate the Inspector should be made fully aware of it.
Provisions are only allowable for tax purposes if profits would not
be properly stated in their absence and the amount referable to the
year can be quantified with reasonable accuracy. Even if these
conditions are met tax law provides that some provisions are not
allowable for tax purposes (for example, for repairs to premises
which are not allowable unless expended).
2.6. The value of stock is primarily a matter of fact which
is ultimately to be decided by the Commissioners in the absence of
agreement.
2.7. Valuation problems can be complex, and farmers normally
seek the assistance of accountants and agricultural valuers and
surveyors. But this is not compulsory and some farmers prepare
their own valuations.
2.8. Although strictly livestock should be valued on an
animal by animal basis, it is acceptable for farmers to value
animals of a similar type and quality together on a global or
average basis classified according to age. If deemed cost is used
(see paragraph 7 below) home bred animals should be distinguished
from animals which have been bought in.
2.9. If tax is lost or delayed as a result of incorrect
valuation of stock then interest and penalties may be due in
addition to the tax.
3.LIVESTOCK, GROWING AND HARVESTED CROPS
3.1. PRODUCTION COST
Production cost is the actual cost of getting the stock into
its condition and location at the balance sheet date. Farm stock
valuations should include the costs directly attributable to
producing or rearing the stock in question. From an accountancy
point of view it is preferable but not mandatory, except in the
case of certain limited companies, also to include a reasonable
proportion of the costs which are only indirectly attributable to
the production of the stock to the extent that those costs relate
to the period of production as this will result in a more accurate
matching of costs with related sales income. Either method, if
applied consistently, is acceptable to Inspectors of Taxes.
3.1.1. Direct Costs
3.1.1.1.Costs which are directly attributable to buying,
producing and growing the livestock or crops should be included.
Such costs will consist not only of the expenses of acquiring the
`raw materials' for example, seeds, but also of any expenses which
directly relate to producing or rearing the stock in question.
There can be no definitive list, but the following are examples of
direct costs:
3.1.2. Livestock
