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Unsold stock at the end of the tax year

Discussion in 'Money, Accounts & Finance' started by steen2thebean, Feb 14, 2012.

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  1. steen2thebean

    steen2thebean Suspended Advertiser

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    What happens to unsold stock at the end of the tax year?

    Does the amount you paid for it need declaring as profit? OR do you take off the amount you paid for it as a business expense?
  2. Dean

    Dean

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    Yes it does need declaring as part of your tax return. I'm not sure exactly of the details as my accountant handles all that but it does affect your profit/loss figure. You can claim it as an expense but then as you say, I think the cost value also goes towards your profit figure.

    I think its supposed to stop people spending all their profit on stock just before the end of the tax year and declaring no earnings.
  3. Gary

    Gary

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    You cannot claim for stock as a business expense as a sole trader as it is claimed at time of sale (which is the only time it really counts for anything), if bought from profits then it needs to be declared, as above, otherwise people would just buy in a load of stock each year to save paying tax, also, if claiming it as a business expense then how could you then class it as an expense as it sells the following tax year (as in sale price - cost = taxable amount (omitting other overheads for simplicity)) as it simply cannot be claimed for twice, basically, your profits as a sole trader are your profits no matter what you decide to do with them (ie. buy stock or not as the stock essentially comes out of your profits until it sells, and only then does it become a business expense).
  4. Dean

    Dean

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    I believe there are different ways of doing it. I don't claim the cost of a product at the point of sale - it would be virtually impossible as most of my actual costs are fluid because of different exchange rates. On my book keeping, I log the total cost of stock on the day I purchase it. As I said I don't know the ins and outs but its all done correctly and checked by my accountant. I know this is an area of contention and has been discussed in many threads on here before. This is why I use an accountant so I know its done correctly!!
  5. Gary

    Gary

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    That's what I meant just worded differently (apologies if it's confusing), here's what I do

    I keep both a purchase ledger and a sales ledger and on top of that I keep my accounts (putting totals in)

    For example (a rough idea):

    In my purchase ledger I'll put 'item: Guitar Hero PC Quantity: 200 total cost: £2000 Cost Per Unit: £10'

    Then when I sell I will put (on my sales ledger) 'item: Guitar Hero PC Sale Price ea: £20 Quantity Sold: 2 total : £40 Cost Per Unit: £10 Total Cost: £20 Postage: £4.41 Fees: £2.59 Profit: £13.00'

    Then at the end of each day I will add up all sales, all postage costs and listing / sale fees then record these into my daily figures, which I will in turn add together at the end of each week, then each month, then on the monthly figures I will take off the other overheads such as utilities, internet, fuel, etc. (the bits I haven't taken off on the daily / weekly sheets as they arise).

    So basically, by claiming the cost of a product at point of sale I mean your own cost price from the time you bought it, as it is obviously only the profits which are taxable, I'm just saying you cannot count the cost of goods before this as a sole trader because the company does not own assets as there is no company and until sold they are technically nothing more than your own property and only really become relevant to the business at point of sale (for tax purposes).

    Hope this explains a little clearer but it sounds as if we work similarly (just word differently), but as long as the outcome is the same all is good :)
  6. steen2thebean

    steen2thebean Suspended Advertiser

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    Thanks for your replies. So if I'm correct, then me being a sole trader - I don't have to declare my unsold stock to the tax man? Although last year of trading, I did have stock unsold and I did declare it and paid tax on it (due to the opinion of my accountant) so obvisouly I was told wrong?
  7. consultant

    consultant

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    What tax did you pay? Are you VAT registered?

    As far as personal tax, why would you pay tax on profit you have not made?
  8. Gary

    Gary

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    That really depends on your personal circumstances, in some cases that is right in others it is wrong, best bet would be to make an appointment with an accountant to explain the best way for your business.

    The basics re. unsold stock:

    You tell the tax man the difference between the prices of stock sold and cost price, less any other tax deductable overheads.

    However, some people confuse this and don't keep records accurately enough, and say in their monthly accounts will say just totals (which is fine if you sell them all, otherwise it is inaccurate), for example, person a may say the total joblot of 50 cost price under the months outgoings when they may have only sold 20 of them and therefore, count the running totals of stock as an expense throughout the year, in which case, remaining stock would need to be declared at the end of the tax year (as only the actual sold stock that counts as taxable earnings), therefore, any unsold stock which was purchased out of profits would not be counted as stock, it would be counted as profit so in this case it is not as simple as column a (sale price) less column b (cost price), as far as inland revenue are concerned they don't care that you bought more stock with your profits as they're still your profits and as such taxable, until such time they sell then they can be offset against the sale price as it's then they become relevant to the business.

    That's why I keep a purchase ledger and record not only the total cost price of 50 x whatever it is, but I will also average it out to a cost per unit, and it's only this cost per unit that will go on to my accounts (with the number of units bought equivalent to the number of units sold) and any further items purchased from the difference (profit) are not put down on my accounts as an outgoing (just on my purchase ledger which they do not see as it's for my records), therefore I do not need to declare unsold stock as I have already (in a way) declared it in my profits by not counting it as an expense to begin with.

    but yes, bottom line, if bought from profit and purchase totals are recorded on the accounts equalling greater than actual units sold, then yes, unsold stock is taxable (well it is both ways as in the other method it is not initially declared as an expense therefore does not need to be 'balanced' at the end of the tax year but then is taxable as profit anyway)

    I hope that makes sense, if not like I say it may be an idea to speak to an accountant (which I am not) as they may be able to explain it clearer.
    Krivvenz likes this.
  9. consultant

    consultant

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    Maybe I am missing something here. The unsold stock (purchased from profits) isn't taxed. It is the profit that bought that stock in the first place. The fact that you have converted the profit into stock is Just confusing things.

    Purchases, sales and stock, although related, are 3 separate things.

    I am not an accountant, but I am sure the principles are the same in all areas.
  10. Gary

    Gary

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    Like I said, it depends on how you log it in your accounts, to save confusion it is recommended to speak to an accountant.

    Basically, if it isn't taxable then what would be stopping someone earning 25k a year, buying 18k worth of stock then declaring 7k profit making them fall under the bracket therefore having nothing to pay?

    Then when it comes round to actually selling the stock accounting the cost price, therefore getting it tax deductible twice, basically it just dopesn't happen, either don't account for unsold stock to begin with or pay tax on it if you do account for it.

    Remembering this is for sole traders, making the stock purchased basically their own posessions until they are sold, inland revenue don't give a stuff if you earn 20k but spend 15k on stock, all they care about is you earned 20k, what you do with it would be your responsibility, not the responsibility of your business because as a sole trader your business holds no responsibility, you do.

    Which is why on your accounts you put sale price: x amount, cost price: x amount gross profit: x amount (for example), but if you have already accounted for stock in the previous tax year as an expense then it cannot be accounted for again or you will always be falsely under declaring to the inland revenue, they don't care about what you haven't sold, that's nothing to do with them hence in my example I don't account for buying anything other than the equivalent of what has actually sold and it is only put into my purchase ledger and costs only moved across and accounted for once sold, because if I had accounted for the full cost of stock at time of purchase and had some unsold then the unsold stock would have to be declared and as such would be liable for tax, as a sole trader YOU hold the stock, not the business therefore it has no 'assets' as such.

    It isn't this (or me) that's confusing things, it's people adding purchases they haven't sold yet onto their accounts system, it only needs to be very basic (on a like for like equivalent per unit basis):

    Sale price - cost price - postage - fees and - any other business related expenses

    This is then put onto your accounts

    Accounts are then accurate for tax return time

    Basically, if you buy 100 of something but sell 57, then only declare the cost of the 57 you have sold on your accounts NOT the cost of the 100

    but IF you have accounted for the cost of the 100 but only sold 57 at the end of the tax year then you need to declare the other 43 as unsold stock and pay tax on it, and so on....

    The difference between cost price and purchase price (after other claimable overheads) is YOUR profit whether it sits in boxes in the form of stock or not as the stock only becomes accountable when it sells.
  11. consultant

    consultant

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    " what would be stopping someone earning 25k a year, buying 18k worth of stock then declaring 7k profit "
    Because, as self employed, you are taxed on profit (sales - cost of sales (i.e. SOLD stock & operating costs), not turnover, purchases or stock!

    "inland revenue don't give a stuff if you earn 20k but spend 15k on stock, all they care about is you earned 20k"
    you have not earned 20k, you have turned over 20k. Assuming you sold all 15k of stock, you have made 5k.

    " it's people adding purchases they haven't sold yet onto their accounts system"
    This is not wrong. What is wrong is if they use that stock value in any profit calculation.

    "The difference between cost price and purchase price (after other claimable overheads) is YOUR profit whether it sits in boxes in the form of stock or not as the stock only becomes accountable when it sells."
    I do not (I am sure accountants wouldn't) class the stock as profit. It is stock, an investment in the business or many other things, but it is not actual profit (maybe the proceeds of profit?).


    As I say (and you have) always speak to an accountant!
  12. Gary

    Gary

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    Remember the op is asking about UNSOLD stock, which is to what my reply is relevant to ;)

    I'm not talking about turnover (trust me I know the difference...lol), I am not talking about spending 15k of turnover on stock, I am talking about spending 15k of profit to get a lower taxable figure (which cannot happen)

    You seem to be omitting which is sold stock and which is unsold stock (and there is a difference), turnover is the amount that you have taken in total

    Profit is the difference between turnover and the cost to reach that amount

    Buying an extra 15k worth of stock (out of profits) a month before the end of the tax year cannot be counted in the profit / loss records (or accounts) for that year because it was irrelevant to achieve the turnover declared as it is unslold, only the sold portion of that can be taken into account (as ONLY the sold portion of cost of stock is relevant to the turnover figure, the unsold portion is not, therefore is still 'sub-profit' if you will).

    An accountant would (or should) tell you to declare unsold stock (if initially accounted for as an expense), and HMRC will tax you on it, it was a very experienced accountant that told me this (I have also known people who have been taxed on it).
  13. consultant

    consultant

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    What happens if the stock is not purchased from profit, but investment?
  14. Dean

    Dean

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    I account for stock at point of purchase, not point of sale. At the end of the tax year I do a stock take and any unsold stock is counted towards profit.

    I don't do that - it would be way too complicated and time consuming. I sell too much to record the detail for each individual sale. Plus the purchase price of stock is always changing which would confuse things even more.

    Exactly - I don't account for it again. Its only accounted for at point of purchase.

    As above - stock take - tell accountant - unsold stock is essentially added to profit.

    As above - perfectly legitimate as long as unsold is declared and not accounted for again when actually sold.

    As above - no way I'm doing this for each individual sale - it would add hours and hours on to my workload!

    Spot on - thats how I do it. My accountant is very experienced and as honest as they come and that's how I was advised to do it.

    The only thing I'm not sure about is when I stock take this year (2nd year) I don't want to be taxed on stock that is unsold from the previous tax return and was already declared. I need to ask my accountant soon!
  15. Gary

    Gary

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    The sales ledger isn't a necessity that's just something I do, but as you say, as long as you account for the value of unsold stock that's no problem as the end result is the same :)

    I know selling large volumes would be too time consuming to do what I do but that is why I outlined both options as we both know, either is fine, and tbh I will probably change back to the other method over time (as I used to before), I only changed to this method as I slowed down my selling side of things as I had other commitments and it does keep it nice and handy for reference purposes if the need arises.
  16. steen2thebean

    steen2thebean Suspended Advertiser

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    Thank you very very much for all your very helpful replies. I am very very grateful to you all and thanks for going over it in such detail Gary.

    Lovinit - how you was told to do yours, that is how I was told to do mine and your response made a lot of sense to me.

    I think I am finally getting it all now.

    I record my stock cost as a business expense throughout the year. So as I have been told to add my unsold stock cost on to the profit at the end of the year, that is just to balance my stock costs out. I wouldn't use this in any way, not this year or any year to try to lower my tax. I do everything honestly, I was just getting worried incase I had been told wrong.


    The items I sell would be extremely difficult to work out individual prices for as I may buy a lot of 500 items for x amount of which some may be damaged/only fit for the bin and another lot of 2 for x amount and about 80 lots of that a year and then instead of selling them individually, I sell them in small lots, so it would take forever to work out the cost of each one as I am always mixing and matching them and often 1 item from 1 box might be the same as 1 item from another box but with 2 different prices.
  17. steen2thebean

    steen2thebean Suspended Advertiser

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    Just this bit now "perfectly legitimate as long as unsold is declared and not accounted for again when actually sold"

    What is actually meant by that statement? I wouldn't record the business expenses (stock cost) if it sold the next year. But are you saying that you don't record what the items sold for the next year? Or do you just take off the cost of the unsold stock out of the next years tax return?
  18. consultant

    consultant

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    As advised by an accountant in another forum:

    Sales
    less cost of sales
    = profit or loss

    Cost of sales = opening stock + purchases - closing stock

    Closing stock is valued at the lower of cost and net realisable value i.e. what you could sell it for so taking into account obsolete, sales stock etc

    Can't get any simpler than that!
  19. Dean

    Dean

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    I'm pretty sure you can't claim the original cost of stock as an expense again the following year. You still have to record the sales though.

    That is essentially what has been said here but in at least 3 different ways!! This is why I pay accountant - unless you are aware of exactly how it works and are completely up to date with all the latest rules, the cost of accountant is worth every penny!!

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