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