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Business diversification: implications for tax

Responding to the challenges posed by COVID-19, many organisations have changed their core business in order to adapt to ever-changing lockdown restrictions. But whether you’re a florist making face masks or a farm shop starting home deliveries, it’s important to consider the tax implications that business diversification could have, as Nottingham chartered accountants Clayton & Brewill explains.

If a business starts a new trade, it’s normally treated as a separate trade for tax purposes. HMRC gives the example of a restaurant making gowns and face masks – something completely unrelated to previous business activity – as a business starting a new trade. If this reflects your business experience this year, there are key issues to consider.

Separate vs similar trade

For instance, you should consider if you are now running two trades rather than one. Or alternatively, has your original trade ceased permanently for tax purposes? In either eventuality, there may be knock-on tax consequences. For income tax, the beginning or cessation of trade impacts on how profits are taxed, and when any losses qualify for relief.

If, on the other hand, a business starts a new activity that is broadly similar to its existing trade, this isn’t likely to be treated as the start of a separate trade; for example, if a clothing manufacturing business starting to make gowns and face masks using existing staff and premises. Profits or losses in this type of instance will therefore be merged with those of the original trade.

A break in trading

A temporary break in trading because of lockdown won’t count as a permanent cessation of trade for tax purposes. This is provided that business activity after the break is the same as, or similar to, that carried on before.

Tip: think points for companies

HMRC is likely to think of a company as carrying on only one trade. Factors which may persuade it otherwise include if one activity is so different in nature from the other that it can be seen as quite separate, and if activities are separately organised and managed up to board level.

Availability of loss relief may be a concern to many at present. Since April 2017, there has been greater flexibility to relieve losses arising in different trades. Relief can however be restricted where trading has become ‘negligible’. This is a technical area: please contact us to discuss specific circumstances.

Don’t forget VAT!

Amongst other issues to watch, it’s the person (natural or legal), rather than the business, that registers for VAT. So, if you have diversified, you may need to review compliance.

As always, the Clayton & Brewill team is happy to provide further advice on the tax implications of business diversification. Please contact us on 0115 950 3044 or send an enquiry here.