Sometimes a business may have ceased trading but then receives income that has not been included in the final cessation accounts, e.g. an insurance payment may be received or a debt that the business owner thought would never be paid is paid. Such receipts would have arisen due to the previous carrying on of the trade. Any such income is charged to tax separately from the profit of the trade (i.e. the previous cessation period is not reopened) but the receipt is still taxed as trading income.
Similarly, a business that has ceased trading may pay Post-cessation expenses – When are they allowable and how?. Examples include costs related to debt collection where such debts were taken into account when calculating earlier trade profits or Post-cessation expenses – When are they allowable and how? incurred to remedy defective work done prior to cessation. For an expense to be allowable, the business must have ceased trading. A deduction is only allowed for an expense that, had the trade not ceased, would have been deductible in computing the trade profits or set off against those profits.
Methods of deduction
There are four ways in which post-cessation expenses can be relieved where they are incurred by the self-employed and partnerships.
The legislation specifies the following order of priority of relief:
- deducted from post-cessation expenses receipts;
- as losses which can be set against total income (known as post-cessation expenses trade relief);
- as losses which can be deducted from chargeable gains; or
- carried forward.
Firstly, allowable expenses are offset against any post-cessation expenses receipts. However, if there are no post-cessation expenses receipts in the period (or the post-cessation expenses exceed the receipts), relief against total income (and/or capital gains) of the person who incurred the expense is available.
For the self-employed and partnerships, relief is given sideways against other income and/or capital gains of the same year and must be claimed by the first anniversary of the usual 31 January filing date for the tax year in which the payment was made, e.g. if a qualifying payment is made in 2024/25, relief must be claimed by 31 January 2027.
Companies can only deduct post-cessation expenses against post-cessation receipts from the same trade. If there are no such receipts, the expense is not deductible. No sideways loss relief is available.
If an Post-cessation expenses – When are they allowable and how? expense cannot be fully relieved using any of these methods, it can be carried forward to offset against any future post-cessation receipts that may be received in the future, otherwise it is lost.
If post-cessation expenses receipts arise within six years of cessation, the recipient can choose to carry back the receipts to the date of cessation.
Restricted relief
If there are insufficient post-cessation receipts against which to offset the post-cessation expenses (i.e. there is a loss), there is a restriction on the amount of claimable expenses that can be allowed against the other net income or the tax year in which they are paid. The set-off is subject to a cap of either £50,000 or 25% of the adjusted total income, whichever is lower. Once net income is utilised to claim the post-cessation expenses, any remaining excess can be set against capital gains of the same year. Anything remaining unclaimed can be carried forward to use against future post-cessation expenses receipts.
Relief is further restricted by the amount of any unpaid debts owed by the trader at the date of cessation. If an unpaid debt restricted the amount of relief in an earlier tax year, it is not allowed in a later year either. If an outstanding debt (which limited relief for an earlier qualifying payment) is subsequently paid to the creditor, then the payment of that debt is considered a ‘qualifying payment’ which can be relieved.
Why post-cessation expense relief matters and common mistakes
Post-cessation expense relief is frequently misunderstood and often overlooked, leading to lost tax relief. A common misconception is that once a business has stopped trading, no further deductions are available. In reality, expenses incurred after cessation can still qualify for relief if they relate directly to the former trade and would have been deductible had the business continued.
Another frequent mistake is failing to apply the correct order of relief. Post-cessation expenses must first be offset against post-cessation receipts before any sideways relief against other income or capital gains is claimed. Incorrect sequencing can result in errors on tax returns and increase the risk of HMRC challenge.
Timing is also critical. Relief is not automatic and must be claimed within strict statutory deadlines. Missing the claim deadline can permanently deny relief, even where the expense is clearly connected to the former trade.
For sole traders and partnerships, post-cessation expenses can provide valuable relief against other income or gains, subject to statutory caps. Companies, however, face more restrictive rules and can only offset expenses against post-cessation receipts from the same trade, making cessation planning particularly important.
Understanding these rules ensures that legitimate relief is claimed correctly and that businesses do not pay more tax than necessary after trading has ceased.
FAQs
Post-cessation expenses are easy to miss, but the relief can still be valuable if claimed correctly and on time.
If you would like to check whether an expense is allowable or ensure your claim is handled properly, feel free to contact AccounTax Zone for tailored advice.
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