IR34                                        29 November 1994

  TAX AVOIDANCE - MANIPULATION OF PRICE OF STOCK WHEN IT IS
    SOLD OR TRANSFERRED FOR VALUABLE CONSIDERATION AT THE
                    CESSATION OF A TRADE

The  Chancellor proposes in his Budget to amend the rules on
the  valuation of stock when a trade is discontinued and sold
or transferred to a connected person.

The Chancellor's intention is to counter avoidance of tax by
enabling  an  artificial price placed on the stock  in these
circumstances to be over-ridden for tax purposes.

The  change  will take effect in any case where  a  trade is
discontinued  on or after today.   It is estimated  that the
measure will yield Pounds 20 million in the tax year 1996-97.

                           DETAILS

1.    At  present,  when a business is discontinued  and its
stock  in  trade is sold to another trader the price  of the
stock  agreed  between the parties is regarded as  a  trading
receipt  of one and a trading expense of the other, whatever
the  value of that stock.

2.    Where  the parties are connected with one another (for
example,  by  means  of a family or proprietorial  link) the
price  of   the stock is sometimes manipulated to produce an
advantageous  overall tax result.   Typically  the  stock is
sold  at  undervalue to create losses to carry  back against
profits  in  earlier years or  to defer the tax liability by
transferring  it  to  the purchaser.   But  occasionally the
stock  is  sold  at overvalue to  create a profit  to absorb
earlier trading losses of the vendor and effectively to pass
on losses to the purchaser.

3.    Subject to the option described below, the value of the
stock   transferred   between  connected   persons   on the
discontinuance  of a trade  will be taken to  be  the amount
which would have been realised if the sale or transfer of the
stock had taken place in an arm's length transaction. This
change  will  take  effect  in any  case  where  a  trade is
discontinued on or after today.

4.    There may be circumstances where the arm's length rule
would   impose  tax  on  potentially  substantial unrealised
profits  even  though no tax advantage  was  sought.   It is
therefore proposed that, where the arm's length value of the
stock exceeds both

a.   the actual sale price and,

b.    its  carrying value for tax purposes, being the amount
which would be taken into account as representing the cost of
the stock if it were to be sold in the ordinary course of the
trade

the  parties  may  make a joint election  to  substitute the
greater of (a) or (b) for the arm's length value.

                      NOTES FOR EDITORS

2.     Section  101(1)(a) of the Income  and Corporation
Taxes Act 1988 provides that the amount realised on the sale
or  the  value  of consideration given for stock transferred
when  a  trade is discontinued will be treated as  a trading
receipt of the business which is ceasing, and the same value
will  be  used  as  the cost of the  stock  of  the business
purchasing the stock.

2.    It  was introduced in 1938 to ensure that a trader who
had   stock   which  had  appreciated  in  value  since its
acquisition  did  not  escape  paying  tax  on  the profits
represented  by  that  growth in value  by  arranging for  a
disposal  of the whole business.    It is now, itself, being
used  to  avoid or defer tax, by manipulation  of  the price
agreed between connected parties.