Natural loss allowances

What it means

Standards of natural loss set how much inventory may shrink naturally, for example through drying, evaporation, dusting, decay or handling. These are losses that cannot be fully avoided in normal storage.

The standards matter mainly for tax. A shortage found during a stock count is tax-deductible within the standards of natural loss, while a shortage above the standard is a non-deductible expense unless it is covered by compensation from the person responsible or an insurer.

The accounting entity sets the standards itself, usually in an internal policy. They must be justified by technical data, past experience or the manufacturer’s data, and should be set in advance, not after a difference has been found.

How it works in practice

We prepare the standards with the client by type of inventory: they differ for vegetables, fuel, bulk materials or spirits. We express them as a percentage of throughput or average stock over the period, and give a reason for each standard.

At the stock count we compare actual stock with the stock records. We first assess any difference against the standard: the part within it is booked as an ordinary expense and the rest as a shortage, and we suggest whether it is damage to be recovered or an error in the records.

If losses in particular years differ markedly from the standard, we propose adjusting it. A standard that goes unused for years, or one the company exceeds every year, looks unreliable in an audit, and the tax office may reject it.

What to watch out for

A standard must not be used to hide theft or poor record-keeping. If losses are suspiciously high or concern goods that do not naturally change, such as packaged electronics, the tax office will not accept them as natural and the shortage will be non-deductible.

For goods subject to excise duty or sold with VAT, a shortage has further consequences. A loss above the standard may trigger a duty to adjust deducted VAT or to pay excise duty, so we always work through the internal policy for such inventory in detail.