Cost

The actual cost of goods including bringing them in (ie delivery costs)

Net realisable value

The amount that you will realistically be able to sell it for. In many cases stock is held which “may” be useful in times to come but in reality this is not in the foreseeable future. In this case it may be that the value is a fraction of the cost or may actually be zero.

There are a number of different categories of stock and the practical way these are valued varies, but nonetheless all use the same principle. In all cases you should consider whether the realisable value is greater than cost and if not take a view on what value to apply.

Raw materials for manufacturing

These will be valued at cost of bringing the product to site. Clearly if the item is complete as it came onto site then the value will be that shown on the invoice. If there are a number of deliveries at different prices these are usually priced on a FIFO (First In First Out) basis, ie assume the oldest stock is used first. So you may have to refer to a number of prices if the quantity in stock is greater than the items on the last invoice.

The next problem is partially used “raw material”, you will need to value this based on what remains, so if it is a product sold by length you will need to measure the remaining amount and pro rata that by the cost of a complete unit (eg cable or fabric). A similar principle can be used for products sold by weight or volume.

Finished goods

These are valued at the cost of the materials used ,including any scrap or off cuts not useable elsewhere, together with the cost of any labour to produce the product.

Goods bought for resale

These are typically retail goods and are valued similarly to raw materials, this may be the area most prone to realisable value valuations due to obsolescence or old product lines.

The big mistake many business owners make is to value goods or products at sales value, this is an incorrect way of valuing and hopefully the above will be of assistance. This article is a brief summary of the principles of stock valuations and may not apply to specific circumstance so please seek professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting – Accountants who “speak your language”

• Any pre budget gains are still taxed @ 18%
• Post budget gains are taxed under new regime
• You can choose whether to offset the £10100 allowance against pre/post budget gains to minimise your tax bill (normally the post budget gains as avoids 28%)
• For post budget gains, once the allowance has been offset (if applicable), the gain is added to the persons taxable income (ie a “top slicing” arrangement):
  • Gains up to the top of the basic rate band are taxed at 18%
  • Gains into HR tax band are taxed at 28%

Example 1 from Budget Note 20 produced by HMRC (see link above)

Example 1
In 2010-11 X’s taxable income, after all allowable deductions and the personal allowance, is £27,400. The upper limit of the income tax basic rate band is £37,400. X sells an asset in May 2010 and realises a chargeable gain of £17,000. In November 2010 X sells another asset, realising a chargeable gain £25,100. X has no allowable losses to set against these gains, and the AEA (Annual Exempt Allowance) for 2010-11 is £10,100. Neither of the gains qualifies for entrepreneurs’ relief.
X’s taxable income is £10,000 less than the upper limit of the basic rate band (£37,400 – £27,400). X sets the AEA against the later gain (because part of that gain is liable to tax at the higher CGT rate), leaving £15,000 taxable (£25,100 – £10,100). The first £10,000 of the £15,000 is taxed at 18 per cent and the remaining £5,000 is taxed at 28 per cent. The £17,000 chargeable gain X realised in May 2010 before the change of rates on 23 June 2010 is taxable at the old 18 per cent rate.

This article aims to be informative and your should take professional advice before taking any steps based on the information shown. If you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting – Accountants who “speak your language”

The Chancellor George Osborne started by painting the picture of the poor state of the economy and among various political comments stated that due a cautious approach fiscal goals would be met one year earlier than expected in 2014.  The inflation target will remain at 2% which has already been exceeded, this will peak at 2.7% later in the year and then reduce.  In terms of the approach to the deficit a lower spending rather than higher tax route is being taken, supporting the stand taken by the IMF and OECD, which will be done in the ratio 80/20, clearly showing the public sector will suffer.  The relationship with Europe will continue with a commitment not to join the Euro, and the government group looking at this area will be disbanded and used for more “useful tasks.”

Turning to the actual decisions, cuts are to be made to existing budgets but there was a commitment to capital spending, particularly if there is economic benefit.  This will be greeted with some optimism by the schools and infrastructure in North Kent which was rumoured to be cut to reduce the deficit.  The Royal Family have accepted that the Civil List will be frozen , and will be subject to annual National Audit Office reviews.  There will be an overall reduction of 20% in departmental budgets but due to commitments to maintain or increase NHS funding and overseas support the actual effect on departments hit by the cuts will be that of a 25% cut.  We will not know the full impact of the cuts until the Spending Review for which the date has been released for the first time as Wednesday 20^th October.

The public sector will face the biggest cuts and the most noticeable to the man in the street is the 2 year pay freeze for staff paid over £21k.  The government wants to encourage the back to work culture and the tax credits system is being used to facilitate this.  Tax credits will be more targeted particularly at the lower paid and will reduce for families with a combined income over £40k.  Child benefit is also to be frozen, the government acknowledging a number of approaches including means testing and taxing the benefit but finally settling on a freeze.  In other areas medical tests are to be introduced for those claiming disability benefit.

For business the main corporation tax rate will reduce by 1% per annum for the next 4 years reducing from 28% to 24% over that time, which will be the lowest rate in the G20.  For small businesses the rate will reduce by 1% only to 20% from next year.  There is also to be a small reduction in the rates of capital allowances, of main interest to small businesses the Annual Investment Allowance will reduce from £50k to £25k, which will still meet the needs of many SME businesses.

Among the miscellaneous changes, the Chancellor is introducing a levy on banks as recommended by the IMF, and this will take the form of a tax based of the size of the bank, small banks will be excluded from this arrangement.  The landline duty to fund broadband expansion is being withdrawn before even being introduced, this will be funded by links with the private sector and local initiatives.  In order to encourage business growth outside London and the South East there will be an NI exemption for new businesses being set up.

The biggest news of the budget and not entirely unexpected was the increase in VAT from 17.5% to 20% from 4 January 2011, but exempt and zero rated items such as childrens clothing and food will be unaffected.

There will be no increases in the previously announced duties for alcohol/fuel etc, but the additional cider increase has been withdrawn from the end of the month (apparently in time for the final 8 in the World Cup!)

In personal tax capital gains tax will remain at 18% for basic rate taxpayers but increase to 28% for higher rate taxpayers, the £10,100 limit will remain.  This may appear good at first sight but gains on property for example may well push basic rate taxpayers over the threshold so will pay 28% anyway.  To continue to encourage entrepreneurship the limit for lifetime gains will be increased to £5m at which an effective 10% rate applies.

Personal tax allowances will increase by £1000 to £7475 from next year, one step towards the £10k limit proposed by the Lib Dems.  The NI thresholds are to be increased and the cost to employers of employing staff paid less than £20k will not increase.  For pensioners the basic state pension will be relinked with earnings after a gap of several years, and in a further attempt to support low income families the Child element of Child tax credits will increase by £150pa.

This is by its nature a summary of the main points we consider of interest to readers, there was alot more content in the whole speech but we hope this will be more easily understood.  The main announcements are on HMRC website http://www.hmrc.gov.uk/budget2010/index.htm .  We hope this will be informative but if you would like advice in this or other areas feel free to call.  Alastair Wood, AW Accounting – Accountants who “speak your language”