CORONAVIRUS - 22.09.2020

Coronavirus - tax fallout following a change in business

During the lockdown your business adapted to new markets to keep going. You’re not sure if the change is permanent or temporary. Either way, there could be important tax consequences. What do you need to know?

Change to trading activities

Because of coronavirus many businesses expanded their operations to stay afloat. Where this amounted to a new trade there are tax consequences. For example, certain expenses might count as capital transactions for which there are special tax-deduction rules. HMRC is aware of the issue and has updated its internal Business Income Manual (BIM) accordingly (see The next step ).

New trade or old?

When looking at your accounts or business records, HMRC may take the view that the nature of your trade has changed or that you’ve begun a new trade. If what you’re doing now is completely unrelated to your previous operation, it will treat it as a separate trade. But if you’re involved in a new activity broadly similar to your existing trade, it will probably count it as an extension to your original business. But, it’s a grey area which is why HMRC has updated its guidance.

Trap. You must keep separate business records for your old and new businesses. However, the same VAT registration can be used unless the trades are run by different entities, e.g. one by a company and the other by a partnership or sole trader.

HMRC examples

HMRC’s BIM gives the following examples of changes in trade and how they are treated for tax purposes.

Example. A restaurant began making gowns and face masks. Even though it operates from the same premises and has the same staff it’s clearly a new and separate trade.

Example. A clothing manufacturer starts making gowns and face masks. It uses with the same staff. HMRC says this is an extension of the original trade even though many of the processes are different.

Tax impacts

If HMRC considers that your old business has ceased, or a new one started, rules about commencement and cessation of trades come into play. For income tax, there are special opening and closing year rules and claims for loss relief. Plus, for unincorporated businesses unless your financial year ends between 31 March and 5 April, it can affect the amount of tax payable and when it’s due. Tip.  If you stopped trading because of coronavirus but have restarted (or soon will) HMRC accepts that it was a continuing business throughout.

Relevant facts

While in some situations it will be obvious whether or not a new trade has commenced or an existing one ceased, HMRC says the decision depends on “the relevant facts of each case” . In other words, you can’t assume the position is the same as another just because on the face of it the circumstances look similar. Tip. If you’re not sure if you started a new trade or ended the old one, read HMRC’s BIM . If you’re still unsure speak to your accountant sooner rather than later; unwinding business records is fiddly and the longer it goes on the worse it gets. If you’re sure there is a new business ask your accountant how to modify your business records.

For a link to HMRC’s BIM, visit https://www.tips-and-advice.co.uk , Download Zone, year 20, issue 22.

If there’s a significant change to the type of business, HMRC may treat your old business as ended and a new one started or that you’re now operating two trades. Special tax rules can then apply, plus you’ll need to keep separate business records for each trade. If in doubt consult your accountant for advice sooner rather than later.

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