I'd go with the second method.

I understand where you're coming from Shaun, however, (there's always a but) using the second method increases the sales (and even if it is for the owner's own use it is still a sale) and the VAT is still charged. If sales are increased then stock is still gone, the VAT is accounted for and as Rob says profit is not affected.

Sheila

Hi sheila,

I'm comfortable with everything except recognising it as a sale.

Just had a look at business accounts by David Cox (Osbourne Books, AAT study material) and that goes with (dr) drawings, (cr) puchases (cr) VAT.

Also checked Business Account 1 (Woods and Sangster) same answer.

The whole principle goes against what FRS3 (reporting financial performance) was designed to combat in that it's opening up a pandora's box of potential profit manipultation.

Forgetting VAT for a moment think of this scenario.

Company year end November 2009.

In October the Director takes £50,000 in goods from the company. The Sale will raise profits by £50,000.

Before the April tax year end the director returns the goods so he has no personal tax liability. However the company accounts will show that for 2009 sales were £50k higher than they really were.

This will raise all the major ratio's making the company look more profitable than it really is so a bank is more likely to approve a loan application.

As an addendum to the above, as the bank depended on documents prepared by a bookkeeper the bookkeeper could be held legally responsible for misleading the bank.

The case law that I'm thinking of for this was audit rather than just preparation of accounts but regardless refer to RBS vs Bannerman Johnstone Maclay and Others (2002) where the bank ended up with a bad loan so went after the poor junior auditor (the bank won).

I can see your point about the stock being gone and the end figure being the same but considering the above scenario I still think that purchases rather than sales is the way to go.

Shaun.

On further investigation Sharkey does not apply in cases of food, where original cost is credited.

However if purchases were credited it would help to maintain the correct GP...but that does not necessarily appease the tax man!

Ah but we are not talking about a company otherwise it wouldn't be drawings. Client gave me a bottle of Bombay Saphire today and I am sampling it. Unfortunately I am going to a boring cpd event in Leicester tomorrow morning..have to be there at 8 so I'd best make this my final glass!

Warning accounts can turn you to drink!

My brain cell has now packed it's bags and leapt out of my ear (think that it was getting lonely anyway). There are arguments for both sides.

The Sharkey case gets thrown around a lot over there. Good quote from Kevin9 :

Budget notice 19 sets out the Revenue's predilection to rely on their interpretation of the old Sharkey vs Werner case. This means that for direct tax purposes the appropriation of stock for own use should be at market value. I think it is unfortunate that this is now being put on a statutory footing because it conflicts with GAAP

So basically they've gone through the same argument that we have here in that HMRC is at odds with legislation.

And they also put the argument for purchases to be charged at market value so maybe it wasn't such an off the wall idea after all!

A useful line I picked up in BIM33630 related to the price is :

market value' may be taken as the lowest price at which he sells the goods in comparable quantities in the ordinary course of trade.

Right, back to the shiny armour one.

Shaun.

Just polishing my shield!

Still think in case of sole trader this doesn't apply.....however when in doubt try to appease hmrc!

Do you think we should get a life Shaun?

ha, how we laugh at those losers in insurance (nearly said banking but remembered your background!!)

Quarter is given!

Here's my thoughts

Shauns view is taken from the view point of the body incorporate and I think from this stance he would be right by applying the companies act to anything involving a Ltd LLP etc. I see it that as a ltd company, there is no owner as such, to remove stock for there own purposes. If however, a director took goods for their own use the business entity would have to sell it to him, they are not his to take (if it was a small family run ltd business probably at cost or if a larger business at a discounted rate, the same as other employees), therefore it would be a sale.

If the business was a sole trader as Rob was saying or partnership then it is the owner removing his own goods, for his own use (In this situation s/he already owns the goods). In this instance he has every right to remove his goods from his business, for his own use. and he would reduce his stock level, he wouldn't sell himself something which is already his, to himself.

Anyways, that's what I thinks. Hope it made sense

Sorry about all the edits but just had a flash of inspiration (It may have been the ale i supped last night)

Doesn't the "argument" revolve around ownership, when something is sold, the ownership transfers as in the Ltd company scenario. For the sole trader/ partnership, ownership is already with the individuals.

-- Edited by Wella on Thursday 11th of March 2010 01:00:26 PM

-- Edited by Wella on Thursday 11th of March 2010 01:17:18 PM