Revenue Note for Guidance
Chapter 7 of Part 4 provides rules for the valuation of trading stock on the discontinuance of a trade (section 89), for the valuation of work in progress at a discontinuance in the case of a profession (section 90) and for the imposition of a charge to tax on certain receipts accruing after a trade or profession is discontinued which could not be taken into account during the life of the business and could not be assessed after the cessation as the trade or profession no longer existed (section 91). The Chapter also contains rules for dealing with a change in the basis on which the accounts of a continuing trade are drawn up (section 94).
This section provides rules for valuing unsold trading stock on the discontinuance of a trade. With one exception, the rules apply to all trades which have discontinued or have been deemed to be discontinued by virtue of any provision of the Tax Acts. The exception is a trade which has been carried on by a single individual and is discontinued by reason of that individual’s death.
Closing stock at the date of discontinuance is valued at the price it is sold, or at the value of any other consideration given for its transfer, to a person who carries on or intends to carry on a trade in the State, provided the cost incurred by such a person is deductible as an expense in the computation of the profits/gains of the trade carried on or intended to be carried on by that person. Closing stock otherwise disposed of is valued on its open market value.
Where the trader to whom the stock is transferred on discontinuance is connected with the trader transferring the stock it is not allowable to value the stock at less than “the lower of cost or net realisable value”.
Section 656 should be consulted concerning the valuation of trading stock of a discontinued trade in the case of farming.
(1)(a) “trading stock” is all property, real or personal, that is sold in the ordinary course of the trade whether or not at the date of the discontinuance it is still in the process of being completed or matured. All materials employed in the manufacture, preparation or construction of such property are also treated as trading stock.
(1)(b)(i) Also included as trading stock are services, articles or material which, if the trade were a profession, would be treated as work in progress for the purposes of section 90.
(1)(b)(ii) For the purposes of this section, two persons are connected with each other if they are connected with each other within the meaning of section 10. That section provides a series of tests to determine whether persons are connected for the purposes of the Act in general. In addition, persons will be regarded as connected if—
(1)(c) The section applies not only to trades which have been actually discontinued but also to trades treated for tax purposes as having been discontinued. Expressly excluded, however, are cases of discontinuances occasioned by the death of a sole trader.
(2) Trading stock at the date of discontinuance of a trade is to be valued —
(3)(a) In the case of transfers between persons who are not connected, the actual transfer price is to be the basis of valuation.
(3)(b) In the case of a transfer between connected persons, an arm’s length price should be taken as the basis of valuation.
These two rules are, however, subject to subsection (4) and the special treatment set out in Schedules 16 and 17 in relation to Building Societies and Trustee Savings Banks.
(4) In the case of the rule applying to transfers between connected persons it is provided that, where the value of the stock as computed under subsection (3)(b) (i.e. the arm’s length price) is greater than both the “acquisition value” of the stock and the actual transfer price, both parties can elect for the stock to be valued at the higher of its acquisition value and the actual transfer price. The election must be included by the person transferring the stock in that person’s tax return for the year of discontinuance.
(5)(a) “Acquisition value” is the amount which would be deductible as representing the cost of the stock if it was sold at the time of discontinuance. This would generally be the cost of the stock but, in the event that the stock had been written down to its market value in a previous period, it would be the written down value brought forward.
(5)(b) For the purposes of working out “acquisition value” of stock, the period for which the profits are to be considered begins immediately before the sale envisaged in paragraph (a). Thus, if the net realisable value of the stock had fallen before the time of “sale”, the figure to be taken as acquisition cost will be the net realisable value at that time.
(6) The deemed transfer value of the stock used for the purposes of calculating the income of the person transferring the stock is also to be taken as the cost of the stock to the purchaser.
Relevant Date: Finance Act 2021