Post-cessation expenses – When and how are they allowable?                    

9 May 2024
by
Zubaria Zafar

Post-cessation expenses – When and how are they allowable?                    

9 May 2024
by
Zubaria Zafar

Post-cessation expenses – When and how are they allowable?                    

When an unincorporated business stops trading, accounts are prepared to the date of cessation. Where a limited company ceases trading, it is either registered as dormant or its directors can apply for the company to be struck off or go into liquidation, if the company is unlikely to be required again in the future. HMRC states that a business ends when it ‘permanently ceases to carry on a trade’.

Sometimes a business that has stopped operations receives income and incurs expenses after cessation and as such the payment was not included in the final cessation accounts. In cases where the accruals basis is followed, most receipts and expenditure relating to the last business period will have been accounted for. However, some post-cessation expenses or receipts may still arise, e.g. an insurance payment or payment of a debt that was previously treated as a bad debt and written off in the cessation accounts but has suddenly been paid. Where profits are calculated on a cash basis (being the default basis of accounts preparation for unincorporated businesses from 2024/25, post-cessation receipts and expenses are treated as though the business continues using the cash basis.

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Any income received after the business has ceased is charged to tax separately from the profits of the original business’s trade. Any expenses relating to that income are deducted from that income, i.e. the cessation period is not reopened. Post-cessation expenses are usually of a type that would have been deducted in computing the profits of the trade, had the trade not ceased. Therefore, the expense must satisfy the ‘wholly and exclusively’ test and be revenue, not capital, expenditure.

An expense is not allowable if it relates to the cessation itself whether it arises directly or indirectly from the cessation of trade. A claim for post-cessation relief is possible if a taxpayer ceases to carry on a business and within seven years makes a ‘qualifying payment’ or a ‘qualifying event’ occurs in relation to a debt of the business. Expenses likely to come under this heading include the cost in remedying or paying damages for defective work done, goods supplied or services rendered while the business was continuing, insuring against liabilities arising out of any such claim and collecting, or seeking to collect, debts which were taken into account in computing the profits of the trade before cessation.

Legislation sets out the order of priority in which post-cessation expenses must be relieved, initially being deducted from post-cessation receipts arising from the same trade in the same year as incurred. Any subsequent excess/loss (whether a claim is made or not due to nil total income) may be allowed against other net income (known as post-cessation trade relief), or capital gains for the tax year in which they were paid. There is a ‘cap’ on the amount that can be claimed which is limited to £50,000 or 25% of adjusted total income.

The relief is also restricted by the amount of any debt owed by the trader that remains unpaid at the date of cessation, if any. Any such year’s relief is limited by this outstanding debt and cannot be carried forward to the current year. The repayment can be relieved if the outstanding debt, which restricted the relief, is subsequently paid.

If an expense cannot be fully relieved using any of these methods, it is carried forward to be deducted from any future post-cessation receipts from the same business. Otherwise, it is lost. If post-cessation receipts materialise within six years, the recipient may carry back the receipts to cessation.

Partner note:

BIM 90090

S24A, s254 Income Tax (Trading and Other Income) Act 2005

S196 Corporation Tax Act 2009

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