Profit extraction – is it an acceptable practice?

Managing the stocks of your company is pretty delicate business. With various regulations in place, HMRC aims to exert a certain degree of control over how the stocks of your business are managed and taxed. There are a set of specific rules that govern when it is acceptable to utilise the goods of your company for personal gains, though HMRC might not recognise them immediately. It’s important to know your rights, and here is what they are.

The 2008 law

Should you decide to take company goods and either use them to make products that will be used for gifts or other personal purposes without bringing direct profit for your company, this might raise a few eyebrows with HMRC, as they have stated that personal use of stuck must be properly documented in your business’s accounts. This, in turn, would increase your tax. In the eyes of HMRC, all stock taken from a business by the owner should be considered a sale at market value (MV). They also pushed for legislation in 2018 to make sure that this is legally valid. As such, it may appear that HMRC is right in taxing you for such practices, as this is the law.

But does it always apply?

While this is irrelevant to companies, since they cannot use this method at all, businesses that prepare accounts on a cash basis are exempt from this rule. If you’re a hotel, restaurant owner, or own any other business that deals with the preparation of meals, there is a whole different set of rules you must follow, and so the 2018 law does not apply to you.

How HMRC’s definitions can be misleading

Even with all that in mind, it is important to understand how HMRC understands stock, so that you can defend yourself in the event that a tax inspector makes a mistake. According to HMRC, stock defines materials that are used in the production process, i.e. raw materials and consumables. There are, however, other deffinitions of stock, and HMRC’s definition doesn’t really apply to stock taken from business for personal use. According to the very legal definition of stock, materials that are used for manufacture, preparation, construction, etc. do not count as it, as stock is only sold through regular trade,

When you are safe

Despite what the HMRC may claim itself, normal selling price doesn’t apply to raw materials, businesses who use cash, as well as those providing meals for restaurant owners. In these cases, an adjustment to cost is still required, but it’s important to keep in mind that it still shouldn’t be treated the same way as stock taken from your business for income and corporation tax purposes.