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Sometimes a business that has stopped operations gets income or incurs expenses that were not included in the final cessation accounts, such as an insurance payment or a debt that was paid. Such receipts resulted from an earlier trade. This income is taxed independently from the trade’s profit (the cessation period is not reopened), but it is still considered trading income. After closing, a business may still have expenses. Examples include debt collection charges included in prior trade profits before the trade terminated and correcting faulty work done before cessation.
A deduction is allowed for a loss or expense that, if the trade had not ended, would have been deducted in computing the profits of the trade for the corporation or income tax purposes or deducted from or set off against the profits of the trade. Such allowed expenses may be offset against post-cessation receipts. If the business has no post-cessation receipts, relief may be granted for bad debts and certain expenses (broadly expenses incurred in remedying defective work or paying associated damages). Relief is given sideways against other income and capital gains of the same year and must be claimed by 31 January but one from the end of the tax year in which the payment was made, e.g. if a qualifying payment is made in 2022/23, relief must be claimed by 31 January 2025. If an expense cannot be fully relieved using any of these methods, it is carried forward to be deducted from any post-cessation receipts received in the future; otherwise, it is lost. If post-cessation receipts materialise within six years, the recipient may carry back the receipts to cessation.
Restricted Relief
If there are insufficient post-cessation receipts to offset post-cessation expenses (i.e. there is a loss), the amount of claimable expenses might be allowed against other net income or capital gains for the tax year in which they were paid. The set-off is limited to £50,000 or 25% of adjusted total income. The relief is also limited by the trader’s outstanding obligations upon cessation. Any previous year’s relief that was limited by an outstanding debt is not allowed to be carried over to the current year. If the debt is repaid, the payment is a ‘qualified payment’ and is c