If you use traditional accounting and take stock from your business for yourself or your family, the tax rules treat it as sold at its market value, not at cost. This is the Sharkey v Wernher principle, now in sections 172A to 172F ITTOIA 2005. If you use the cash basis, that rule is switched off and you make a just and reasonable adjustment instead, usually by adding back what the goods cost.

What did Sharkey v Wernher decide?

Sharkey v Wernher [1955] 36 TC 275 is a House of Lords decision. HMRC’s Business Income Manual at BIM33630 summarises the principle it established: where a trader takes stock for private use, or for use in another business they own, or brings into the business stock they own in another capacity, the transfer is treated for tax as a sale or purchase at market value. Goods taken for the personal use and enjoyment of the trader and their household should be credited at market value.

The reasoning is that the trader has had the benefit of a deduction for the cost of the goods. Simply removing them from stock at cost would leave the business with no profit on goods that a customer would have paid full price for.

What does the legislation say?

The principle was put into statute in Chapter 11A of Part 2 ITTOIA 2005 for Income Tax, with equivalent rules for companies in sections 156 to 161 CTA 2009.

  • Section 172A defines trading stock as anything sold in the ordinary course of the trade, or that would be if it were mature or complete. Services performed in the course of the trade are excluded.
  • Section 172B applies where trading stock is appropriated by the trader for any other purpose. The amount it would have realised if sold on the open market at that time is brought in as a receipt, anything actually paid for it is ignored, and the receipt arises on the date of appropriation.
  • Section 172C works the other way: if something you own privately becomes trading stock, its cost to the business is taken as its open market value at that time.
  • Sections 172D and 172E apply the same market value approach to other disposals and acquisitions made outside the course of the trade, and section 172F gives the transfer pricing rules priority where they apply.
  • Section 172AA says nothing in the chapter applies when profits are calculated on the cash basis.

How is market value worked out?

For a retailer, market value is normally the price you would charge a customer. BIM33630 adds that where a trader gives special terms in the course of the trade, market value may be taken as the lowest price at which the trader sells the goods in comparable quantities in the ordinary course of trade. A wholesaler who sells to trade customers at a discount can therefore use that trade price, but not a price below anything it actually offers.

Keep a simple log of what is taken, when and its selling price at the time. That record is far easier to defend than an estimate made at the year end. Valuation of the closing stock itself is covered in stock valuation.

What is the simplified option for cash basis traders?

Since 6 April 2024 the cash basis has been the default for sole traders and partnerships, so many small traders are now outside the Sharkey rule entirely. HMRC’s guidance at BIM72015 says that a cash basis business does not need to bring in the value of goods taken for personal use as a receipt. Instead it should make a just and reasonable adjustment to reflect the uncommercial transaction, for example by disallowing the cost of the goods.

The tax return notes say the same in practical terms. The SA103F notes for box 60, and the SA103S notes for box 27, tell you to enter the disallowable amount, usually the cost, if you take goods or stock out of the business, and to use the normal sale price instead if you use traditional accounting. The choice of accounting basis therefore changes the figure. See cash basis vs accruals accounting for how to choose.

A worked example

Illustration only. Nadia runs a delicatessen. During the year she and her family take goods that cost her £1,200 and would have sold in the shop for £1,800. The cost of those goods is already included in her purchases.

Accounting basis Adjustment Extra taxable profit
Traditional accounting Add market value as a receipt £1,800
Cash basis Disallow the cost £1,200

Under traditional accounting the £1,800 sits on top of a cost that remains deducted, so the business is taxed as if it made a normal sale. Under the cash basis, adding back the £1,200 simply cancels the deduction, so no profit is recognised on the goods. The £600 difference is the margin the shop would have earned.

What does the rule not cover?

BIM33630 lists situations where the market value rule does not apply and only the cost is disallowed under section 34 ITTOIA 2005:

  • services the trader provides to themselves or their household, such as a decorator painting their own home;
  • meals provided to the proprietors of hotels, boarding houses and restaurants and their families;
  • spending on building an asset intended from the outset to be a fixed asset of the trade;
  • any transactions of a business using the cash basis.

The services point is important for tradespeople. A plumber who fits a bathroom at home is not taxed on the value of the labour, but must not claim the materials or any helper’s wages as business costs. Private use of business assets such as a van or phone is a separate question of apportionment, not a stock adjustment.

How does HMRC check own goods?

Own goods are a standard line of enquiry for retailers and caterers. HMRC’s Enquiry Manual at EM3510 notes that goods taken without payment depress the gross profit margin, and officers rebuild the margin with a mark up exercise. It describes three acceptable ways to show own goods on the return: including them at retail value in turnover, excluding their cost from cost of sales and showing it as disallowable, or showing the adjustment as an addition to net profit. Whichever you use, the figures must reconcile; an unexplained low margin with no own goods adjustment invites HMRC to assume missing sales. See what happens in an HMRC compliance check and record keeping for the self employed.

Is VAT due on goods taken for own use?

Yes, if you are VAT registered and the goods are standard rated. VAT Notice 700 paragraph 9.3.1 says that when goods belonging to the business are put to private use you make a taxable supply, including goods from stock and goods you produced yourself. If the private use is permanent and nothing is paid, VAT is due on the cost of the supply, meaning what it would cost you to buy the goods at that time. The VAT value is therefore a cost figure even where Income Tax uses market value.

What about companies and gifts to staff?

Companies follow sections 156 to 161 CTA 2009 for stock disposed of outside the trade. Where stock goes to a director or employee, BIM47110 points to further questions: the employment income charge, whether the transfer is a distribution, and what deduction the company gets. Those are covered under benefits in kind. For a sole trader, goods taken are part of their drawings.

What mistakes come up most often?

  • Removing goods at cost under traditional accounting instead of market value.
  • Making the adjustment twice, for example reducing purchases and also adding the value to turnover.
  • Forgetting goods given to family and friends, which are appropriations just as much as goods eaten at home.
  • Overlooking the separate VAT charge.
  • Making no adjustment at all, leaving a gross margin that HMRC will test.

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Reviewed by Christine Anderson, Broker, Solar Protect. Last reviewed 8 October 2026. Part of Accountapedia, the Solar Protect guide to UK tax and accounting. This page is general information, not personalised advice.