The existing business
Part 3 of 4
This is the Finance Act 2020 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2021 to 31 March 2022. Candidates sitting ATX-UK after 31 March 2022 should refer to the Finance Act 2021 version of this article (to be published on the ACCA website in 2022).
So far in this article we have reviewed some of the fundamental rules relating to the taxation of the unincorporated trader and compared the total tax paid on the profits of a business depending on the business vehicle used. We are now going to look at the tax implications of a change of accounting date and the cessation of a business.
The rules used to determine the basis periods on a change of accounting date are not easy to learn. In addition, the application of the rules to a particular situation can also cause difficulties. Accordingly, it is important to learn and practise the rules as part of the revision process.
It may be helpful to note the following points and to use them as a check once the calculations have been prepared.
James has always prepared accounts to 31 December. He has changed his year end to 30 September and prepared accounts for the nine months ended 30 September 2020.
Prior to the change of accounting date, James had an overlap period of three months (1 January to 5 April). Following the change of accounting date he will have an overlap period of six months (1 October to 5 April).
A cessation occurs when the individual unincorporated trader is no longer carrying on the business; the business itself may have been sold (or gifted) such that it has not ceased but is being carried on by someone else.
Choice of date of cessation
The date of cessation determines the tax year in which the business ceases and the calculation of the taxable trading profits for the final tax years under the closing year rules. A trader may be in a position to choose the most beneficial date of cessation from a tax point of view.
For example, where a taxpayer is about to sell a business and has little or no other income, it may be beneficial to carry out the sale at the start of a tax year (say, 2020/21) rather than at the end of the previous year – this would enable the offset of the personal allowance for 2020/21, which would otherwise be wasted.
The tax year in which a business is sold will also determine the availability of the annual exempt amount and, where business asset disposal relief is not available, the rate at which capital gains tax will be paid.
Trading losses on cessation
On the cessation of a business, the loss relief position is made more complicated by the availability of terminal loss relief in respect of the loss of the final 12 months of trading. Accordingly, there are two alternative reliefs available (or even three if the business is transferred to a company in exchange for shares). Each alternative may need to be considered in detail in order to determine the potential tax saving. As always, it is important to be sure of the precise income and/or chargeable gains that the losses can be offset against – and the periods in which the offset can occur.
Haile ceased trading on 30 June 2020. His results in the final periods of trading were:
Haile had unrelieved overlap profits of £2,700 as at 30 June 2020.
Haile’s terminal loss is calculated for the final 12 months of trading by reference to tax years.
(6 April 2020 – 30 June 2020)
3/9 x £11,250 loss
(1 July 2019 – 5 April 2020)
|1 July 2019 –|
30 September 2019
(3/12 x £11,400 profit)
1 October 2019 –
(6/9 x £11,250 loss)
Relieving the terminal loss
The terminal loss can be offset against trading profits of 2020/21 (the final tax year of trading) and 2019/20, 2018/19 and 2017/18 (the three preceding tax years, later years first).
The loss of the final trading period that does not form part of the terminal loss (£2,850) is available for offset against general income and chargeable gains of 2020/21 (the year of the loss) and/or 2019/20 (the previous year).
Relieving the trading loss of 2020/21 against general income and chargeable gains
The trading loss of 2020/21 of £13,950 (£11,250 + £2,700) is available for offset against general income and chargeable gains of 2020/21 (the year of the loss) and/or 2019/20 (the previous year).
Value added tax (VAT)
When considering the ‘tax implications’ of a particular commercial transaction or situation it is important to consider all of the possible taxes unless they are specifically excluded by the question.
On the cessation of trading a taxpayer is treated as having made a supply of all inventory, equipment and other items in respect of which input tax was claimed. The output tax in respect of this deemed supply is payable to HM Revenue & Customs unless it does not exceed £1,000.
In order to be able to deal with questions concerning choice of year end, change of year end and choice of cessation date you need to be very confident of your knowledge of the basis of assessment and change of accounting date rules together with the rules concerning the offset of trading losses.
Note: The unincorporated trader is also considered in:
Written by a member of the ATX (UK) examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.