Alan Pink looks at the sometimes thorny question of when a business ceases to trade, and why it’s important.
The question of whether, and if so when, a business has stopped can be crucially important for all kinds of tax reasons. The following are just a few of them:
1. Loss relief
Generally speaking, if you have losses to carry forward in your business, the very last thing you want to do is cease trading. The reason for this is that losses in a business effectively disappear, and are no longer available for carry forward against income, if that business has ceased.
On the other side of the coin, terminal loss relief can apply when you cease, and this can sometimes be useful in allowing losses in the last period to be carried back against profits from earlier periods. So you need to know precisely when the business ceased, so as to know what profits are available to carry the loss back against.
2. Capital allowances
If you have plant and machinery of any kind on which capital allowances have been claimed, the date of cessation of a business results in a ‘balancing event’.
This broadly means that the value of all your assets on hand is treated as if it had been received by way of a sale of those assets, and the difference between these deemed sale proceeds and your expenditure on which you haven’t yet claimed allowances becomes either a tax charge or a tax allowance, depending on whether you make a ‘profit’ or a ‘loss’ on this calculation.
3. VAT
When you cease trading (or, in VAT language, cease to make taxable supplies) you are de-registerable from VAT, and you should tell HMRC this.
More significantly in many cases probably, the effect of ceasing to make taxable supplies is that you have the VAT clawed back on any assets you have on hand at the date of de-registration, on which VAT was originally claimed. This can be potentially a ruinous tax charge in the case of large assets, like buildings on which VAT was charged.
4. Business asset disposal relief
This is the relief formerly (until March 2020) known as entrepreneurs’ relief. If you are carrying on your business as a limited company, you can continue to enjoy the relief (which gives a 10% capital gains tax (CGT) rate, subject to a lifetime limit of £1 million) effectively for three years following the cessation of the company’s trade.
If you dispose of the shares, either by way of selling them or of liquidating the company, within this three year period, the fact that the company is no longer trading at the actual date of disposal is not a problem. But of course, if you ‘run this one up against the wire’ you can expect some searching questions from HMRC as to the precise date of the cessation.
5. Other CGT reliefs
Holdover relief applies to gifts of business assets, and shares in trading companies. The rules don’t seem to be at all clear here, but there is an implication that this trading activity, of the business or company, needs to be going on still at the time of the gift. If it isn’t, you could end up with holdover relief being denied and a capital gain being treated as arising by reference to the market value of the asset you have given away. That is, it’s as if you’ve sold the asset for its market value, and tax becomes payable on that figure. So this question can form an important part of your planning if you are proposing to pass value on to the next generation, say. If there is a window of opportunity to make gifts like this which closes with a loud clang when the business ceases.
Another relief which is sensitive to the date of cessation of trade is rollover relief. This is a relief from CGT, which applies where you sell a trading asset and buy another one.
A gain made on the old asset is deducted from the carried forward cost for CGT purposes of the new asset, and tax doesn’t arise at the time of this disposal, unless the old asset was not used for the purposes of a business throughout your period of ownership. Any periods of non-trading will therefore result in a portion of a gain on which you can’t claim rollover relief.
6. Inheritance tax
Business property relief (BPR) is an incredibly generous relief from inheritance tax (IHT), effectively eliminating the value of the business completely from your taxable estate. But the business does need to be actively trading at the relevant time – when the business is passed on upon death, or when it is given away.
If you want to claim business property relief (BPR) on a lifetime gift, which becomes chargeable to IHT because the donor fails to survive seven years, you not only have to have a trading business at the time of the gift, but also at the time of the subsequent death. So one can imagine situations where families desperately keep otherwise moribund businesses going until the seven year period from when the business was given to them has safely elapsed.
7. Limited liability partnerships
Limited liability partnerships (LLP’s) are a strange beast, in that they are bodies corporate legally, but are treated as if they were partnerships; all the time they are carrying on a trade or business with a view to profit. If an LLP ceases to carry on any such trade or business, it becomes ‘opaque’, as tax advisers describe it. That is, it becomes equivalent to a limited company.
There’s no room here to describe all the potentially strange and interesting consequences of a partnership suddenly becoming a company, but for good or ill the date on which this occurred and the question of whether it has occurred, of course, can be crucially important.
Case law authority
Inevitably, the decided cases there are on cessation of trade are only going to be of limited use, because (as the lawyers put it) the time of cessation of trade is a question of fact, and will depend on the facts and circumstances of each case.
However, case law does give us a few pointers to situations where trade is likely to have been treated as ceasing and when it isn’t. In IRC v Nelson CS 1939, 22 TC 716, the taxpayer was a whisky broker who decided to cease trade, and closed his bank account on 15 July 1937. On 16 July a circular was sent to the customers advising them of the cessation. The disputed question was whether a sale of the stock to one of its customers on 27 July was a trading profit, and the Special Commissioners found that it wasn’t, because he had ceased business on 15 July. So realisation of stock after cessation of trade doesn’t extend the trading period.
In the more recent case Aproline Limited v Littlejohn [1995] SpC 36, despite referring to a 1925 case where the decision went the other way, the company was treated as ceasing trading on the day that its sole customer, Air Europe, went into administration. The company carried on activities after this date, in that it was collecting debtors, paying off creditors, paying a dividend, and trying to obtain new business. However this didn’t wash with the Special Commissioner who decided that the company had ceased trading not later than 31 March 1991.
Similarly, the case of Hudson’s Bay Co Limited v Stevens [1909] 5 TC 424, is authority for the proposition that realising capital assets following the cessation of a business doesn’t constitute trading.
However, BPR for IHT purposes can sometimes be ‘pulled back from the brink’, as in one case (Brown’s Executors v IRC [1996] SpC 83), which involved a company that had disposed of its whole business and was sitting on a large cash balance. The Revenue, unsurprisingly, claimed that the company was no longer trading as it had sold its business, and therefore this highly valuable IHT relief wasn’t available. The company’s argument, which (perhaps surprisingly) succeeded, was that they were looking around for a new business to invest the cash in, and therefore the company was still intending to trade and met the BPR criteria. This must have been an extremely well presented case, in which a lot of evidence was available and put before the judge on the strenuous effort that the company was making to find a new line of business.
Property businesses
The question of whether a property business has ceased, you would have thought, would be a much simpler one. If you own a property and you are letting it out, you are carrying on a property business. If you sell all your properties, that property business has ceased; and one of the effects is that the property losses are no longer carried forward. But there is an indication that a short period of no rent coming in from properties does not necessarily mean that the property business is permanently defunct.
