## Facts

- Lady Zia Wernher carried on a taxable trade of breeding racehorses at a stud farm and separately kept racing and training stables as a non-taxable hobby.
- During the accounting year ending 30 April 1948, five young horses were transferred from the stud farm’s trading stock to the private racing stable.
- In the stud-farm accounts, the horses were carried at production cost (about £700 each; about £1,888 total).
- The horses’ open-market value at the transfer date was substantially higher (about £3,900 each).
- The parties agreed that the stud farm’s trading account required a credit entry because the horses left stock-in-trade; they disagreed whether the credit should be cost or market value.
- The Special Commissioners credited cost and discharged the assessment; the High Court restored an assessment on market value; the Court of Appeal reinstated the Commissioners’ cost approach; the House of Lords allowed the Inspector’s appeal.

## Issues

1. When trading stock is withdrawn from a taxable trade and applied to the taxpayer’s private or other non-trading purposes, must the trade’s accounts bring it in at market value or at cost of production for income-tax profit computation?

## Decision

- The House of Lords allowed the Inspector of Taxes’ appeal and reversed the Court of Appeal.
- The court held that the stud farm must be credited with the horses’ market value at the date of withdrawal from trading stock.
- The assessment computed on a market-value basis was upheld.

## Legal Principles

- For computing taxable trading profits, a disposal of trading stock otherwise than in the ordinary course of trade (including withdrawal for private or non-trading use) is treated as if the trader had sold the stock at market value on the disposal date.
- The rule is a profit-computation principle: it does not depend on an actual sale or the possibility of “trading with oneself,” but on ensuring the trade accounts reflect the true profit position when stock ceases to be available for sale in the trade.
- Using cost on withdrawal can understate taxable profits where stock has appreciated; market-value treatment prevents distortion of trading results through diversion of valuable stock to non-taxable uses.

## Conclusion

The House of Lords required market-value recognition when trading stock is taken out of a trade for private or non-trading purposes, treating the withdrawal as a notional sale at market value to ensure accurate computation of taxable trading profits.


Sharkey (Inspector of Taxes) v. Wernher, [1956] A.C. 58 (H.L. 1956)