A close look at post-cessation expenses claims can save traders money.
Post-cessation receipts are taxable income of the person when they receive them, similarly relief may be available for post-cessation expenses. To make a successful claim for an allowable post-cessation expense:
- the trade must have ceased, and
- the expense would have been deductible in calculating the trading profits ie they still meet the wholly and exclusively test and be revenue in nature in order to qualify for relief.
HMRC clearly states that a business ends when it ‘permanently ceases to carry on a trade’. A mere decision to wind down or dispose of the business does not of itself amount to a permanent discontinuance if trading activity in fact continues after the decision (J & R O’Kane & Co v CIR).
If a trade ceased and then later restarts the same activities in scale and nature to the old one, it is a question of whether a new trade (albeit doing the same thing) has commenced or whether the existing trade has restarted. BIM80565.
How to claim relief for post-cessation expenses
Post-cessation expenses incurred by those subject to income tax can be (claimed in the following order):
- deducted from post-cessation receipts arising in the same period
- as losses which can be set against total income
- as losses which can be deducted from chargeable gains
- carried forward to be deducted against future post-cessation receipts from the same trade.
Key facts when claiming general expenses against post-cessation receipts
- The cessation expenses itself are not allowable costs, because they would not have been incurred had the trade continued. The rules are similar for both income tax and corporation tax.
- Methods used to prepare the tax computations prior to the cessation continue to apply to the post-cessation receipts and expenses ie cash basis or using mileage rates for vehicle costs instead of actual expenses.
- Specific rules apply for these expenses and are not covered within the s255 ITTOIA
- employer pension contributions;
- site restoration costs where land has been used for mineral extraction;
- Lloyd’s underwriters; and
- companies in compulsory liquidation which accepted bank deposits.
- For traders within the charge to income tax, general post-cessation expenses cannot be set against receipts that are linked to specific post-cessation expenses, such as insurance recoveries, debts paid after cessation.
Key facts when claiming specific expenses against net income and capital gains
Relief is available for post-cessation expenses against total income and/or chargeable gains if:
- the person makes a ‘qualifying payment’ (see BIM90110), or
- a ‘qualifying event’ occurs in relation to the debt owed to the person.
The above ‘qualifying payment’ or ‘qualifying event’ must happen within seven years of the date of the cessation. A similar relief is available for post-cessation property expenses.
A ‘qualifying payment’ includes the payments made:
- to remedy defective work done, goods supplied or services provided
- as damages for defective work done, goods supplied or services provided
- for legal or professional costs incurred in connection with a claim that the work done, goods supplied or services provided were defective
- to insure against such defective work or the associated legal and professional costs, or
- to collect debts that were owed to the trader prior to the cessation of trade.
A ‘qualifying event’ relates to trade debts which only prove to be irrecoverable after the date of cessation and applies if:
- an unpaid debt was included in the calculation of trading profits prior to cessation; and
- the person is still entitled to receive the payment of that debt (ie it has not been assigned); and either
- the debt proves to be bad; or
- the debt is released as part of a statutory insolvency arrangement.
Restriction on the amount of the claim
ITA 2007 section 24A places a restriction on how much of the above amounts can be set against the net income of the tax year in which they are paid. The set off against income tax is subject to the £50k or 25% of adjusted total income cap. Once the net income is utilised to claim the post-cessation expenses, the excess can be set against capital gains of the same year. Anything remained unclaimed can be carried forward to use against future post-cessation receipts.
The relief is also restricted by the amount of any debts owed by the trader that were unpaid at the date of cessation. If an unpaid debt restricted the amount of relief in an earlier tax year, it is not allowed in a later year either. If an outstanding debt, which restricted relief for an earlier qualifying payment, is subsequently paid to the creditor, then the payment of the debt is a ‘qualifying payment’ which can be relieved.
There is prohibition on double counting of the claim, which means post-cessation trade relief is not available for an amount for which relief is given, or is available, under any other provision of the Income Tax Acts.
Anti-avoidance rule denies relief for any payment or event that is made in connection with a ‘relevant tax avoidance arrangement’. (ITA 2007, s. 96- 101)
Deadline for claiming post-cessation expenses
The relief must be claimed by the first anniversary of the 31 January self-assessment deadline for the tax year in which the qualifying payment or event occurred. For example, if a qualifying payment is made in 2017-18, relief must be claimed by 31 January 2020.
Post-cessation expenses which do not fall into the above categories
If the person incurs post-cessation expenses which do not fall into the categories of ‘qualifying payments’ or ‘qualifying events’, the only method of relief (after deducting them from post-cessation receipts) is to carry them forward to set against future post-cessation profits of the same trade (see BIM90000).
Article from ACCA In Practice