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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 expenses after cessation. Examples include costs related to debt collection where such debts were taken into account when calculating earlier trade profits or expenses 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 receipts;
- as losses which can be set against total income (known as post-cessation trade relief);
- as losses which can be deducted from chargeable gains; or
- carried forward.
Firstly, allowable expenses are offset against any post-cessation receipts. However, if there are no post-cessation 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 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 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 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.
Partner note:
Business Income Manual 90080
s 254 Income Tax (Trading and Other Income) Act 2005, s 196 Corporation Tax Act 2009