Goods or Services for your own use. Help please

lozzark

I know this might sound trivial, but it sends me round the bend every year when I try to complete my self assessment form.
As a very very small business I resell some products. Some I sell and some I use. I keep track of them all. The question is "am I liable to pay income tax on the goods I use for myself?"
HMRC advice doesn't help me. Here is the advice.
Goods or services for your own use
If you, or your family or friends, take any stock or manufactured goods out of your business you must include the value here (and not the cost to you) of what was taken out, unless you have already included such value in your turnover.

If you have included gross expenses earlier in this section that is, you did not take off any disallowable expenses there, enter those disallowable amounts.
The issue is what does "value" mean. Is it the price I bought the goods at or the retail price I would have sold them at? What does "cost to me mean?" Is that the price I paid for them from my supplier?
What are disallowable expenses?
I know that in the USA and Australia you do have to pay tax on the profit you would have made, but my sister who used to work for HMRC says the UK is different.
If I put the value of goods for own use in the box in the on-line self assessment form it increases my tax by 20% of the whole amount, not just the "virtual" profit. I know I can get round that by including the value of goods in turnover, and including their cost in allowable expenses, but obviously the amount I paid my supplier is included in allowable expenses, but I still have to decide whether to put their resale value in turnover or cost price.

zygurat789

All the goods you purchase should be in purchases as a tax allowable expense.
If some of these goods are used by yourself, for personal rather than business use, then the whole sale value must go in sales and it will increase your profits by the total sales value because the cost of these goods has already been allowed against tax in purchases.

lozzark

Thank you for your reply.

So I understand from your reply that all the goods I have bought go into allowable expenses at the price I paid for them. Now I can see that I include the goods I used to myself in either goods for own use or turnover. Very good. that helps.

The price I include them in as part of turnover is at whole sale value. Is that the same as retail price? (ie the price I'd normally sell them to a customer). If so, you are saying one has to pay tax effectively on the retail markup. It's as if I were selling to myself.
However, as I understand it there is no Law that I have to sell at standard mark-up: I can give discounts or charge for delivery for example, so how is the retail price defined?

zygurat789

lozzark wrote: »

Thank you for your reply.

So I understand from your reply that all the goods I have bought go into allowable expenses at the price I paid for them. Now I can see that I include the goods I used to myself in either goods for own use or turnover. Very good. that helps.

The price I include them in as part of turnover is at whole sale value. Is that the same as retail price? (ie the price I'd normally sell them to a customer). If so, you are saying one has to pay tax effectively on the retail markup. It's as if I were selling to myself.
However, as I understand it there is no Law that I have to sell at standard mark-up: I can give discounts or charge for delivery for example, so how is the retail price defined?

Goods or services for your own use
If you, or your family or friends, take any stock or manufactured goods out of your business you must include the value here (and not the cost to you) of what was taken out, unless you have already included such value in your turnover.

No one will ever know exactly how much has been taken as goods for own use, you just have to be reasonable and honest otherwise you are guilty of fraud.
If it's a grocery shop then the figure will probably be larger than if it were an ironmongers.

Pennywise

lozzark wrote: »

However, as I understand it there is no Law that I have to sell at standard mark-up: I can give discounts or charge for delivery for example, so how is the retail price defined?

Simple.

Just put yourself in the shoes of your average customer. Give yourself the same kinds of discount that you would for a customer buying a similar quantity of goods. Give yourself the same discount for not having to deliver as you would if a customer came to you and collected it instead.

You wouldn't sell your goods to a customer for cost price or at a loss (unless they were obsolete or faulty or damaged) so don't sell them to yourself at cost price or a loss.

None of this is fixed in stone and no-one, not even a tax inspector, can force you to "sell" something to yourself at full price, but it's a matter of the "duck test". If it walks like one, sounds like one, looks like one, it's a duck. Same with selling things to family, friends and yourself. Nothing wrong with giving a modest discount, but it's got to be reasonable and realistic.

If you usually apply a mark up of 20% for "normal" customers, then probably no harm in reducing the mark up to 10% for yourself, family and friends. As long as you don't take the mickey, you shouldn't be challenged!

Of course, would be far better if you just bought your own stuff separately so it never went through the books at all. I always recommend separate orders/trolleys if a client wants to buy things wholly for personal use from suppliers or wholesalers, paid for directly by the private bank account, so they never go anywhere near the business accounts. Solves a lot of the problems! That only leaves the occasional personal/family purchase of things that are bought intentionally to sell and drastically reduces the scale of the problem.