HMRC has updated its guidance on the tax implications of a business changing its trading activities due to the Coronavirus crisis.
Covid-19 has led to many businesses having to adapt by:
HMRC has set out how it will apply legislation and case law to some of these scenarios.
It should also be noted that Bishop Fleming's tax team may take a different view from that expressed by HMRC, so do please contact your usual advisor to discuss your specific circumstances.
If a business starts a completely new trade that is unrelated to its previous activities, this is normally regarded as the commencement of a separate trade. (see BIM80530).
However, if the new activity is broadly similar to the existing trade, this may not be treated as the commencement of a separate trade and thus any profits or losses can be merged with the existing trade.
The example HMRC gives is of a restaurant business which starts to make gowns and face masks. This should be treated as the commencement of a separate trade. But where a business is already making clothing, the manufacture of gowns and face masks using the same staff and premises should be treated as an extension of the same trade and not the commencement of a new one.
A temporary break in trading activity does not normally amount to a permanent cessation of the trade for tax purposes.
For example, if a business stops trading during the coronavirus lockdown period, but intended to continue trading after restrictions were lifted, then the trade should not be treated as having ceased. Any income and expenses relating to the gap in trading will be reflected in the calculation of trade profits or losses, subject to the usual tax rules and case law.
This is dependent on the resumption of activities following the break being the same, or similar, to those prior to the break (see BIM80580).
However, where the business does not in fact recommence after what was originally intended as a temporary break, the date of cessation will be determined with the relevant facts in mind (see BIM38300+ and BIM80500+).
Some businesses may have sought monetary donations to enable them to supply products or services to the value of the donations received.
Other income received in return for services provided will be taxable as miscellaneous income. (see BIM100000+).
The trading and miscellaneous income allowance gives relief to individuals with trading and/or miscellaneous income, up a total of £1,000 (see BIM86000+). The allowance is applied once across all income the individual has from a sole trade. Where the allowance is claimed, then no relief can be obtained for any expenses.
Revenue expenditure recognised as such in a trader's accounts will be allowable as a deduction in computing taxable trade profits, unless denied by specific legislation or case law.
A key consideration is whether costs have been incurred wholly and exclusively for the purposes of the trade. This will be determined as a question of fact on a case-by-case basis, taking account of the aims and objectives of those who decided to incur the expenditure. (see BIM37000+ and BIM37055).
HMRC says it would expect this to be evidenced by, for example, minutes of meetings or other supporting documents. Where the facts show that the reasons were philanthropic rather than business-focussed, the expense will be disallowable (see BIM37510).
Expenses which provide an incidental non-trade benefit are not disallowed provided the purpose of the expenditure was to benefit the trade. But if the facts show that achieving the non-trade benefit was a purpose (even if not necessarily a main purpose) in incurring the expenditure then HMRC will disallow the expense.
If an identifiable proportion of the expenditure can be identified as incurred wholly and exclusively for the purposes of the trade, that proportion is not disallowed by HMRC (see BIM37007).
Where a business makes a donation of goods or services, HMRC will consider the impact on the taxable trade profits. In particular:
Profits foregone on goods supplied at a discount to the normal selling price will not be considered a gift by HMRC if the transaction is part of the trade and the trader’s costs have been covered (see BIM45065).
Where the recipient has provided a service to the business, HMRC will not allow a deduction for the gift unless it can be shown that the trader was under an obligation to provide it (BIM45013).
Business Entertainment and Gifts
Expenses that have been incurred wholly and exclusively for the purpose of the trade may nonetheless be disallowed by HMRC on the basis that they have been incurred in providing business entertainment or gifts (see BIM45000+).
However, the costs to a business of giving away its own goods or services for the purpose of advertising to the public is not considered by HMRC to be expenditure on business entertainment (see BIM45032).
The cost of small gifts which carry conspicuous advertising for the trader are generally allowable, BIM45070 provides detail of the exceptions to this.
Donations of stock to charities
BIM45072 provides guidance on donations to charities.
If stock is donated to a charity, the trader doesn’t have to record any receipt for the donation. This would apply, for example, if a business donated trading stock to a charity for homeless people.
However, it wouldn’t apply if stock is donated to a non-charitable body, individuals or a business. In such cases, the amount which the stock would have realised if sold in the open market at the time of the disposal should be brought into the calculation of trading profits.
In the exceptional circumstances of a crisis – e.g. the coronavirus ‘lockdown’ period - distribution chains, market outlets, willing buyers etc. for some types of stock will be severely disrupted, so market value will have to take that into account.
The market value rule does not apply to services provided.
Some businesses may offer partial refunds to customers - for example, during the coronavirus ‘lockdown’ period some businesses offered refunds on car insurance policies, gym memberships or other subscription-based services and annual policies.
Where these are included as trade expenses in the accounts, HMRC would expect these amounts to be allowed. The original receipt should have also been included in the calculation of trade profits.
Medical supplies and equipment:
If a company donates medical supplies or equipment, from its trading stock for humanitarian purposes, it does not need to record any income for the items donated (see BIM45180). This only applies to donations by companies, not sole traders or partnerships. It applies whether or not the donation is to a charity.
Examples of medical supplies and equipment will include face masks, gowns, hand sanitiser and ventilators. The incidental costs of packaging and distribution will also be allowable.
Staff seconded to charities and educational establishments:
The employer’s costs of staff seconded to charities and educational establishments are specifically allowable as trade deductions (see BIM47120).
Where staff are seconded to other bodies, the costs will be allowable provided the secondment is wholly and exclusively for the purposes of the trade.
HMRC's guidance does not cover all scenarios. If you would like to discuss how your business has been affected by the Coronavirus lockdown and what impact this may have on your tax position, please contact your usual Bishop Fleming advisor.
Also, check out our Business after COVID-19: Transition Knowledge Hub.