Tax, trading activities and COVID-19
Susan Cattell outlines recent HMRC guidance on the tax consequences of changes in trading activities driven by COVID-19.
Disruption to normal trading during the pandemic
COVID-19 and the resulting lockdown has had a significant impact on many UK traders. Some have been forced to shut down temporarily, but others have changed what they do. Tax will not have been at the forefront of their minds, but the changes may have tax consequences which will need to be considered.
HMRC has updated its Business Income Manual (BIM) to give some guidance in BIM 48000 on how it applies legislation and case law to some common scenarios arising from crisis-driven changes to trading activities, together with cross references to other relevant sections of BIM.
New trade or expansion of existing trade?
This will be an important question because of the rules around commencement and cessation of trades and the loss relief rules.
If a business starts carrying on an entirely new trade, completely unrelated to its previous activities, then this should normally be treated as the commencement of a separate trade. HMRC gives the example of a restaurant which starts manufacturing gowns and face masks.
By contrast if a business that is already manufacturing clothing begins to manufacture gowns and face masks, using the same staff and premises, HMRC comments that this should be treated as an extension of the same trade and not the commencement of a new trade.
These examples are clear cut; in less obvious scenarios it will be important to look closely at all the facts and apply the principles derived from case law: HMRC cross refers to BIM80500+ for a more detailed discussion of the considerations which will inform HMRC’s approach.
Temporary breaks in trading activity
It will also be important to distinguish between the cessation of a trade and a temporary cessation of trading activity. Many businesses may have been forced to close their doors to customers because of the lockdown – but intend to continue trading once restrictions are lifted. HMRC notes that in these cases the trade should not be treated as having ceased. Any income and expenses related to the gap in trading will be taken into account in calculating profits or losses, subject to the usual tax rules.
The guidance goes on to say that this is dependent on the activities after resumption being the same, or similar to those before the break. Where a business does not recommence after what was originally intended to be a temporary break, the date of cessation will need to be determined in the light of the relevant facts.
Income and expenditure
HMRC also considers the treatment (including some reliefs which may be available) of a range of receipts businesses may have received and expenses they may have incurred as a result of the pandemic. These include:
- Donations of money to the business, from the public or employees
- Donations of goods or services by the business
- Gifts of trading stock
- Donations of stock to charities
- Refunds/partial refunds to customers (for example, gym memberships and car insurance)
- Donations of medical supplies and equipment from trading stock for humanitarian purposes
- Staff seconded to charities and education establishments.
VAT – transfer of a business as a going concern
BIM 48000 does not address any VAT issues but ICAS asked HMRC for its views on the transfer of a business as a going concern. Can a TOGC take place where businesses such as pubs and restaurants (or shops with no online presence) have a significant break in trading, possibly for several months? Would the analysis be different depending on whether staff have been furloughed or made redundant?
HMRC’s response indicated that it would not see a business that has been temporarily closed due to Government dictated COVID-19 restrictions as suffering a ‘break in trading’ that is different from a seasonal business or a business that may shut temporarily for refurbishment. If the business was operating before the shut down and it is intended to continue once the restrictions are lifted, then normal TOGC rules would apply. This would also apply to businesses that have had to furlough staff – provided the business remains live, even if temporarily dormant because of COVID, then a TOGC could take place. However, a business that has completely ceased and remains so after restrictions are lifted would not be a TOGC. HMRC noted that they may have to look at individual cases; it might therefore be useful to retain any relevant evidence.
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