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.
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 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.
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.
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.