Summary
- Stock purchases are not automatically deductible for corporation tax. Only stock sold reduces taxable profit, so accurate year-end stock valuation matters.
- Stock must be valued at the lower of cost or net realisable value. Slow-moving or discounted stock may qualify for a write-down and a tax deduction.
- Damaged, faulty or unsellable items should be identified and recorded throughout the year, as they may be revalued or removed from stock, reducing taxable profits.
- HMRC requires item-specific evidence for stock reductions. General estimates for wastage or depreciation are not accepted.
The annual stock-take isn’t exactly your favourite thing to do. You know resources could be better spent elsewhere so you try to get through it as quickly as possible. Why might it be worth a little more of your time?
No relief for unsold stock
Remember, your company cannot use the cash basis to prepare its accounts. As such, it must adhere to accounting principles. One outcome of this is that the company doesn’t simply deduct amounts it has paid for stock in the year from its income.
Instead, only the stock sold during the year reduces taxable profit, determined by the stocktake. Running down stock towards the year end therefore makes good sense, but it’s not the only way to save corporation tax.
Valuation rules
It’s not just the number of items and how much you paid for them that determines the stock value for your annual accounts, there’s a special valuation rule. HMRC follows accounting principles and these say that stock must be valued at the lower of:
Cost. This is the price you paid for the item plus other expenses incurred in bringing it to its current location, namely transport costs; and
Net realisable value. This is the price you estimate the items can be sold for less any transport costs needed to complete the sale.
You’re required to make a realistic valuation of stock. This means items you think will have to be sold at a discount must be revalued if the selling price will be lower than the initial cost.
Example. In 2024 Acom Ltd, a wholesale business, spent £20 per unit on a line of children’s sandpits. These didn’t sell well in the 2024 season, but Acom marketed them again in 2025 at a reduced price of £25 each; i.e. still above cost price. They didn’t shift any items and now with its 2026 financial year about to end Acom still has 1,000 units on hand. The sales director decides to offer them to customers for just £10 each to get rid of them. Acom must revalue this stock for its 2026 accounts at (1,000 x £10) = £10,000. Acom will get a tax deduction for the £10,000 drop in value. Acom pays corporation tax at 25% and so the revaluation saves it £2,500.
Damaged goods policy
In our example the need for a stock revaluation was obvious, but that’s not always the case. For example, are there items at the back of your stockroom which are faulty or have damaged packaging and so your workers avoid selling them? The longer they sit there the less likely they are to be sold. You can probably revalue these items but you need to know about them first.
Create a policy and make your staff aware that they should record all items of damaged stock immediately. You can revalue these at the year end.
Compare last year’s stock report with this year’s. If you identify items you’re certain can’t be sold, scrap them or give them away as a gift with purchase. This won’t usually trigger any tax consequences other than reducing the value of your stock for accounting and tax purposes.
Be precise
A final word of warning; you’re not allowed to take a broad brush approach to revaluation. For example, you can’t adjust down the value of stock because year on year you know you’ll have 3% wastage. The key to tax deductions for devalued stock is to have a thorough stock-take procedure and good record keeping.
