All bases of stock valuation other than the lower of cost and
net realisable value and mark to market are not acceptable for IT
purposes.
The
notional replacement cost method (that is, a
notional price at which the trader would have to buy stock in order
to realise the normal rate of profit), BSC Footwear Ltd v Ridgeway
[1971] 47TC495 is not acceptable but see
BIM33135 for a description of an
acceptable replacement cost method.
Following Patrick v Broadstone Mills Ltd [1953] 35TC44, and
Minister of National Revenue v Anaconda American Brass Ltd
BIM33120, PC1955, 1 All ER 20, the
base stock (a predetermined number of units of
stock carrying a fixed unit value, with any excess over this number
being valued on the basis of some other method) and
last in first out forms of valuation are not
allowable for tax purposes.
A basis which “although in form made on a recognised
basis,
pays insufficient regard to the facts” is
not a valid basis of stock valuation. This is
supported by comments made in Threlfall v Jones [1993] 66TC77 where
Bingham L J referred to the Anaconda case and then went on to
comment on page 118 on Lord Radcliffe’s judgement in Owen v
Southern Railway of Peru [1956] 36TC602 saying
“He held, however, that the company must
fail because its claimed deductions did not represent an accurate
discounted assessment of what it might ultimately be liable to pay.
In a sense, the company failed on the facts, not the
law.”
Where a trade or business uses a non-valid basis of stock
valuation and changes to a valid basis the principles established
in the Bombay Commissioner of Income Tax v Ahmedabad New Cotton
Mills Co Ltd. [1929] case are relevant to the change, see
BIM34000 onwards.
