Unprecedented Activities During Unprecedented Times?
Many businesses have carried out new activities during the ongoing Coronavirus pandemic or alternatively were forced to temporarily suspend all trading activities.
In light of the above, HMRC have recently updated the section in their Business Income Manual which relates to ‘Crisis-driven changes to trading activity’ to now cover the potential specific impacts of the Coronavirus pandemic on trading activities.
This blog will cover the main changes:
1. New Trading Activities During COVID-19 & Lockdown
When a business carries out an entirely new activity which is completely unrelated to its previous activities, then this will usually be treated as the commencement of a separate trade.
However, 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 initiation of a separate trade, and thus the profits or losses should be merged with those of the existing trade.
Whether the new activity is completely unrelated and therefore a separate trade or a broadly similar one will be judged on a case by case basis.
In their guidance, HMRC provide the following COVID-19 specific examples:
- If a restaurant starts manufacturing gowns and face masks then this should be treated as a new trade.
- If a business which already manufacturers clothing articles starts to manufacture gowns and face masks, then this should be treated as an extension of the same trade. It should be noted that HMRC ‘s view is that the same staff and premises should be used in order for it to be treated as an extension of the same trade, the latter of which could cause difficulty for small businesses given the encouragement to work from home.
2. Temporary Termination of Trading Activities
Temporary breaks in trading activities will not amount to a permanent cessations of the trade for tax purposes.
In particular, HMRC provide the examples of the temporary closure of customer-based businesses or those which ‘otherwise ceased trading during the coronavirus lockdown period.’ Thus, these examples accommodate a wide range of businesses such as restaurants, hairdressers, non-essential shops, beauty salons etc.
However, the businesses must have intended to continue the same or similar trading activities after restrictions were lifted.
Moreover, any income/expenses during this break will be taken into account when calculating trade profits or losses.
If in reality the business does not recommence after an originally contemplated temporary break, then there will be a cessation for tax purposes.
3. Donations Received/Made
Some businesses have sought donations of money during COVID-19 to enable them to supply products or services to the value of the donations received. For example, the online fundraising platform Crowdfunder stated in May that more than £5m has been pledged to help 900 small businesses.
Receipts intended to meet revenue expenditure or which supplement trade income (e.g. cash grants for small businesses) are treated as trade receipts.
Income of a casual nature, in return for services will be taxed as miscellaneous income. Therefore, individuals receiving trading/miscellaneous income may be eligible for the trading and miscellaneous income allowance of £1,000. However, electing this allowance means that no relief can be obtained for any expenses (see below).
Donations made – Revenue Expenditure
In general, the key consideration of whether to allow a cost is whether the cost has been incurred wholly and exclusively for the purposes of the trade. This is a question of fact which is determined on a case by case basis (mainly by looking at the purpose of the expense).
Factors that point towards donations having not being made wholly and exclusively for business purposes include: 1) that the voluntary body has no local connection to the business, 2) a personal connection with the donee 3) a lack of publicity surrounding the making of the donation.
If the facts show that the reason for the expenditure was charitable rather than business-focused, the expense will be disallowable.
Using the above principles, an example of an expense being disallowable may be if the director of a printer manufacturing business donated some printers to their sister’s business to enable them to work remotely more efficiently, and did not publicise this on social media.
However, please note specific rules apply for the donation and manufacture of medical supplies – please see HMRC guidance for further details.
Some businesses offered partial or full refunds to customers during lockdown for services such as car insurance, gym memberships or other subscription-based services and annual policies. These refunds will be generally accepted as allowable expenses provided the original receipt was included in the calculation of trade benefits.