Stock shortages and damage

What it means

A shortage is the amount by which the physical stock of an asset falls below the book figure, and it surfaces at the stocktake. Damage is an impairment that cannot be put right; both go to expenses that tax normally refuses.

A shortage is not a natural loss. Wastage within a norm set by an internal directive is ordinary consumption, whereas a shortage is missing property; the opposite case, a stock surplus, goes to income rather than against the shortage.

A shortage or damage and the compensation the company receives for it are two separate items. The expense is booked as soon as the gap is found; compensation from an employee, from the perpetrator or an insurance payout goes to income only once the claim is acknowledged or awarded. The two are not netted, even when the amounts match.

How it works in practice

Tax accepts shortages and damage only in the exceptions the Income Tax Act lists: up to the compensation received, for damage from a natural disaster, and for damage caused by an unknown perpetrator where the police confirm it.

The other side is VAT: where goods on which the payer claimed an input deduction have vanished, the deduction usually has to be paid back. Against an employee a shortfall on entrusted assets is pursued under an agreement on liability for entrusted assets.

When a stocktake shows a gap, we help the client add to the inventory list a stocktake record explaining the cause, with the statement of the responsible employee. Only then does the managing director decide whether the shortage is claimed from the employee, from the insurer or taken entirely to expenses, and that decision is what the entry is based on.

What to watch out for

The costly mistake is to write the shortage off to expenses and forget both consequences. At an audit the amount is added back to the tax base and the deducted VAT is assessed on top with interest, so the missing goods get paid for twice.

A shortfall cannot be docked from an employee’s wages just because management decided so. A deduction needs a written agreement on pay deductions or another legal ground; otherwise it is an unpaid part of net pay, which the labour inspectorate will order to be paid, adding a fine on top.