Many businesses have been adversely impacted by the pandemic and in order to survive, they have had to adapt and, in some cases, diversify their offering.
During a time of challenge, positive new stories of businesses who have made changes and have been able to spot opportunities have been welcomed, showing much innovation and inspiration to others.
Whilst this is commendable, as always, such businesses need to understand the impact of this change in terms of the accounting and taxation rules.
This short article highlights why the nature of trade is important and other associated areas that businesses may be facing during this time, such as new types of income and expenditure.
Why is the nature of trade important?
When a business starts carrying out an entirely new trade, completely unrelated to its previous activities, then this should normally be treated as the commencement of a separate trade.
If a business starts carrying out a new activity that is broadly similar to its existing trade then this should not be treated as the commencement of a separate trade. Its profits and losses in this case can be merged together with the existing trade.
An example within the HMRC manual explains this as follows:
If a restaurant business starts manufacturing gowns and face masks then this should be treated as the commencement of a separate trade. However, if a business that is already manufacturing clothing articles starts to manufacture gowns and face masks using the same staff and premises then this should be treated as an extension of the same trade and not the commencement of a new trade.
Temporary breaks in trading activity
Temporary breaks in trading activity do not amount to a permanent cessation of the trade for tax purposes. For example, if a business closed its doors to customers, or otherwise ceased 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. This is on the basis the activities following the break are the same or similar to those prior to the break.
Any income and expenses relating to the gap would need to be reviewed as to whether they related to a new trade or an extension of the same trade.
Where a business does not recommence after an originally intended temporary break, the facts would need to be reviewed to determine when the business actually ceased.
Some businesses may have sought donations of money to be able to supply products or services to the value of the donations received. Receipts intended to meet revenue expenditure or to supplement trade income, are trade receipts. Income of a casual nature would be taxable as miscellaneous income.
The trading and miscellaneous income allowance gives relief to individuals, up to a total of £1,000.
Some businesses may incur different expenditure during this time, than they have before. An important point to note here, is that the rules outline for expenses to be tax deductible they must have been incurred wholly and exclusively for the purposes of a trade. Expenditure that provides an incidental non-trade benefit are not disallowed provided the purpose of the expenditure was to benefit the trade. Provided the facts do not show that achieving the non-trade benefit was a purpose in incurring the expenditure, if they did then the expense would be disallowed. If an identifiable part or proportion of the expenditure can be identified as incurred wholly and exclusively for the purposes of the trade, that part or proportion is not disallowed.
In addition, where a business makes donations of goods and services, they should consider the impact on the taxable trade profits. While the cost of gifts and donations is generally disallowable, there are provisions which allow particular donations. Also, gifts of trading stock may not always result in a taxable receipt.
During the pandemic businesses may be making refunds, such as gym memberships, and these amounts should be allowed as expenses within the accounts.
There are a whole host of different types of expenditure to consider, from small gifts, donations and foregone profit and refunds, and businesses should ensure they understand whether they will qualify for an allowable deduction or not.