Consignment stock

Consignment stock is inventory a supplier places at a customer's premises while keeping ownership of it. Title does not pass on delivery; it passes when the customer consumes, uses or sells the goods, and that is the moment the obligation to pay is created. Until then the stock sits on the customer's shelves and on the supplier's balance sheet.

That is the whole term. Everything else - reporting frequency, minimum stock levels, who counts what - follows from the fact that possession and ownership have been separated on purpose. It is close to vendor-managed inventory, where the supplier decides what to replenish, and the two are often run together, but VMI describes who plans the stock while consignment describes who owns it.

When title passes, and what HMRC calls it

UK VAT treats these arrangements as goods supplied on sale or return, approval or similar terms. HMRC's position in the VAT guide is that the goods have not been sold and you still own them until they are adopted by the customer, and adoption means the customer indicating a wish to keep them. That gives a clear rule for the tax point:

1. If a time limit of 12 months or less has been fixed for adoption, the basic tax point is the date that limit expires.
2. If no time limit has been fixed, or the limit is longer than 12 months, the basic tax point is 12 months from the date the goods were sent.
3. If the customer adopts the goods before the limit expires, the date of adoption becomes the basic tax point instead.

Two details catch people out. Receiving a payment that is not returnable normally indicates the goods have been adopted, so a non-refundable payment can trigger the tax point even if nobody has reported usage. A deposit that is repayable if the goods are returned, taken as a condition of delivery, does not. And HMRC puts the burden on the supplier to make sure customers notify them promptly once goods have been adopted - which is exactly why the reporting clause in the agreement is not administrative detail.

Where it is used, and what the agreement must cover

Hydraulics is the classic case: a distributor holds hose, fittings, seals and couplings in a bin system at a customer's maintenance store, so a breakdown at two in the morning is fixed from stock on site rather than from a next-day delivery. The same pattern runs through fasteners, PPE and consumables. In promotional merchandise a distributor might hold blank apparel for a key account so reorders draw down without a purchase order each time; in office furniture a dealer might hold standard task chairs on site for churn as headcount changes.

A workable consignment agreement names the goods covered, the storage location and conditions, the minimum and maximum levels to be held, how often the customer reports usage, how consumption is confirmed, the payment terms that run from the point of use, who carries the risk of loss or damage while the goods are on site, and what happens to unused stock when the arrangement ends.

The risks split neatly. For the supplier it is stock that goes missing, gets damaged or reaches the end of its shelf life while it is out of sight; because the customer holds goods they do not own, the accountability for loss has to be written down rather than assumed. For the customer it is dependence: stock they should be buying outright, sitting on their shelves for free, until the supplier changes the terms or withdraws the arrangement.

Practically, the requirement is being able to see both kinds of stock in one place. Consignment lines have to be visible and countable alongside owned stock, but excluded from stock valuation and from the balance sheet, which is why they are usually flagged rather than kept in a separate system. Tracking on-hand levels and movements through the same inventory records as owned stock, with the consignment lines marked, keeps the usage report and the invoice pointing at the same numbers.