The decision of how and when to cease a business is usually prompted by a combination of three main factors - market conditions, market forces, and life changes. Unfortunately, many businesses will have been adversely affected by the coronavirus outbreak and some will now be facing closure.
Under the self-assessment regime, the final tax year in which a business is taxed is the tax year in which it actually ceases to trade, so if the business stops trading on 30 September 2020, the final year of assessment will be 2020/21. The tax bill for the year before that is based on the accounting year that ended in the tax year before trading stopped (so if accounts are made up to 30 June each year, the tax bill for 2019/20 is based on profits for the year that ended on 30 June 2019). Profits (if there are any) from the accounting date in the previous tax year (30 June 2019 in this example) to the date on which the business finally stops (30 September 2020), are then charged to tax for the tax year in which the cessation occurs (2020/21). Therefore, that final period may be more or less than 12 months long (15 months in this example – 1 July 2019 to 30 September 2020).
Jack has been trading for many years and makes his accounts up to 30 September each year. He narrows his options to stop trading to one of two dates:
- 30 June 2020
- 31 December 2020
Jack’s annual tax bill is calculated as normal up to and including the 2019/20 tax year (based on accounts for the year ending on 30 September 2019). His final tax bill is for 2020/21 as this is the year he ceases to trade. So, depending on the date he chooses to stop trading, his final tax bill is based on profits for:
- 9 months from 1 October 2019 to 30 June 2020, or
- 15 months from 1 October 2019 to 31 December 2020
If Jack had ‘overlap profits’ when he started his business, and he hasn’t used them during the lifetime of his business (for example, on a change of accounting date), he can claim relief for them against his final year’s tax bill.
Terminal loss relief
A loss in the last 12 months of trading can usually be offset against trading income of the tax year in which the business permanently ceases and the three previous years. Terminal loss relief is given as far as possible against the profits of later years before earlier years, even if the result is that personal tax allowances are wasted. So, if there is a terminal loss in 2020/21, it is set first against income from any other sources in 2020/21 (for example, against employment income). If any loss is left over after it has been set against other income, the balance is set against any income in 2019/20, then 2018/19, and finally against 2017/18. HMRC will issue a refund of tax overpaid or set the refund against any outstanding tax bills.
The time limit for making a claim for terminal loss relief is four years from the end of the tax year in which the loss arises.
Deregistering for taxes
HMRC must be notified when a business ceases. This may include deregistering for Class 2 NICs and VAT.
For VAT-registered businesses, deregistration must be undertaken within 30 days of ‘ceasing to make supplies’ by submitting form VAT 7 (included in the HMRC VAT Notice 700/11: Cancelling your registration) to HMRC. Once HMRC are satisfied that registration should be cancelled, they will confirm the effective date and issue a final VAT return. The business will need to account for VAT on stock and certain assets on hand at the close of business on the day the registration is cancelled.