Post-cessation expenses: What you need to know in the UK

Closing up shop? When a business stops trading in the UK, there are a few things to consider regarding income and expenses that arise after the closure. This guide will explain when and how post-cessation expenses are treated for tax purposes

When does a business “cease” trading?

HMRC considers a business to have ceased trading when it permanently stops carrying on its trade. This applies to both unincorporated businesses (sole traders and partnerships) and limited companies.

What about income and expenses after closure?

It’s not uncommon for businesses to receive income or incur expenses even after they’ve stopped trading. Here’s how these are handled:

  • Accruals basis: If you use the accruals basis for accounting (common for limited companies), most income and expenses from the final trading period will already be accounted for. However, there might still be some post-cessation receipts or expenses, such as an insurance payout or an unexpected payment for a previously written-off debt.
  • Cash basis: For unincorporated businesses switching to the cash basis from April 2024 onwards, post-cessation receipts and expenses are treated as if the business is still operating but using the cash basis.

Tax treatment of post-cessation income and expenses

Any income received after the business closes is taxed separately from the original trading profits. Luckily, you can deduct related expenses from that income to reduce your tax bill. Here’s the key point:

  • Allowable expenses: These must be expenses that would have been deductible as normal business expenses if the business hadn’t closed. They should be wholly and exclusively for the purpose of trade and be revenue expenditure, not capital expenditure.

What expenses aren’t allowable?

Expenses directly or indirectly related to the business closure itself cannot be deducted.pen_spark

Qualifying for post-cessation relief

There are ways to claim tax relief on certain post-cessation expenses within seven years of closing your business. This applies to qualifying payments or events related to debts from the business, such as:

  • Fixing or compensating for defective work, goods, or services provided while the business was trading
  • Insuring against liabilities arising from such claims.
  • Collecting debts that were previously included in your trading profits.

How is post-cessation relief claimed?

There’s a set order for claiming relief on post-cessation expenses:

  • Offset against post-cessation receipts: This applies to receipts from the same trade in the same year the expense is incurred.
  • Post-cessation trade relief: Any remaining loss can be used to offset other income (up to a maximum of ¬£50,000 or 25% of your adjusted total income). This can also be used against capital gains for the tax year.
  • Carry forward: If the expense can’t be fully relieved using the methods above, it can be carried forward to offset against any future post-cessation receipts from the same business.

Remember:

  • There are restrictions on relief related to outstanding debts at the closure date.
  • If post-cessation receipts arise within six years, you might be able to carry them back to the cessation year for tax purposes.

Further resources:

For more detailed information, you can refer to the following HMRC guidance:

  • BIM 90090Sections 24A and 254 of the Income Tax (Trading and Other Income) Act 2005
  • Section 196 of the Corporation Tax Act 2009

We recommend consulting with a qualified accountant if you have any specific questions about your situation.

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