I have a small confession to make. I am ‘Engine Driver’ who posted the query ‘Was book find an appropriation from trading stock?’ in the new queries on 17 October. The replies were published in the issue of 7 November. The query reads as follows:
‘My client is a dealer in rare books. He also collects books and memorabilia on railway history. Quite often he will buy a collection of books – say when somebody is clearing their deceased parent’s house – and if he finds a rare or interesting railway item, he will often take it to add it to his personal collection rather than put it as stock for sale (he doesn’t have a shop and operates exclusively online). Some of these items can be very valuable.
‘When buying a collection he will pay a single price for the collection and, quite often, it is only when the collection is inspected at his premises that he finds rare items (and, of course, sometimes he finds that what he has paid for is a collection of duds not worth the price).
‘Recently he came to me to say that, in a collection for which he paid £750 in total, he found an early book on the Liverpool and Manchester railway worth £5,000.
‘He asked me about tax. Was this an appropriation from trading stock? If it was it will produce a trading receipt of £5,000. But he would argue that it never entered trading stock in the first place. If instead he were to disallow the cost of the book in computing trading profit he couldn’t separately identify what he paid for that particular book.
‘In fact, he would have paid £750 for the collection whether or not the railway book was included.
‘What would Taxation readers advise?’
I don’t actually have a client who had done this nor, I hasten to say in case HMRC or my boss are reading this, do I carry on a trade of bookselling on the side. So why did I post the question?
One of the people I follow on social media is an antiquarian bookseller who quite often posts about his book finds at auctions, book fairs and the like. He tends to show videos of himself unboxing the books (yes, I know, you can feel the excitement from here) and will often mention that he will be keeping one or more of the books for his own collection while selling the rest. He didn’t show the railway book I mentioned but there is genuinely such a book on sale at that price online from a different seller.
That got me thinking about tax and the principle of the market value adjustment when an item is appropriated from trading stock. I happen to think that that rule is one of the more absurd parts of the tax legislation. How can it be that the transfer of horses from Lady Zia Wernher’s stud farm to her racing stables in 1948 can lead to the result that a shopkeeper taking a tin of beans from her shop to cook for her lunch has to pretend for tax purposes that she has sold them to herself. But, absurd or not, that it is the law and, of course, the principle has now been legislated for in ITTOIA 2005, s 172B.
Our respondents pointed out quite rightly that, on the figures in my example, there would be a deemed trading receipt of £5,000 on appropriation to trading stock, but that does beg the question of whether or not the book was ever trading stock in the first place. That was what my question was trying to tease out.
Let us suppose that our individual goes to a book fair in the frame of mind of: ‘I’m going to buy some books – some of which will be for me and some of which I will sell.’ When he gets home, he divides them into two piles – keep and sell and then lists the books for sale on his website. Could it really be said that the keep books ever became part of his trading stock? What about the situation where he goes to an auction to buy books for sale but on unpacking them finds a couple that he wants to add to his personal collection? He takes them out before listing the other books to sell. Does his state of mind make a difference?
But what happens if, instead of buying a job lot he buys the books individually, having spotted a couple which he wants for his collection, but with the others going into trading stock? Does that change things?
And what about how he pays for them? In the old days one might have asked whether he wrote a cheque on his business or personal account but these days he probably settled by credit card or direct bank transfer. How much does the method of funding make a difference. Assume that he buys a job lot and funds it by a bank transfer from his business account. Is that fatal? And if he reimburses the business bank account from his personal account for the cost of the books that he doesn’t put on sale? Or if he pays by credit card? Does it matter which account the credit card bill is settled from?
Does the method of sale change things. If he has a physical book shop and he puts this railway book on the shelves for customers to buy but after a couple of weeks takes it down again and puts it into his own collection it would seem that he has appropriated it to trading stock. But if he (as many booksellers now do) just has an online presence, when does the book enter trading stock: it is when he adds it to the list of books for sale and presses the save button?
Of course, you can extend the thought process. What of the shop owner who buys 12 cans of beans – ten for the shop and two for herself. If the ten and the two are run separately through the till does that mean that the two never became trading stock? It is not difficult to see that there could be an almost infinite variety of ways in which these sorts of mixed purchases could be structured. Where do you draw the line?
Finally there is the question of cash basis. BIM33630 tells us that where a trader has elected to use the cash basis there is no market value adjustment for own goods – instead there is simply a disallowance of costs. Given that cash basis is now the default method of computing profits for turnover up to £150,000 a year perhaps most of the problems with own goods will disappear. Certainly, I recall that back in my day in the revenue most own goods adjustments were fairly nominal anyhow and I don’t suppose things have changed much since then.
So back to my question. If I were advising the bookseller here I would first check to see if the cash basis applied, in which case the answer is simple – just disallow a nominal amount for the cost of the book. But if he were on an accruals basis I would be pretty comfortable in advising that unless the book actually went onto his shelves (actual or virtual) for sale to customers it never formed part of his trading stock and therefore after disallowing the cost of the book he was not required to bring into account the £5,000 value of his windfall.
I’m sure readers will soon tell me if my advice would fall on the wrong side of the line.