The existing business
Part 3 of 4
This is the Finance Act 2023 version of this article. It is relevant for candidates sitting the ATX-UK exam in the period 1 June 2024 to 31 March 2025. Candidates sitting ATX-UK after 31 March 2025 should refer to the Finance Act 2024 version of this article (to be published on the ACCA website in 2025).
So far in this article we have reviewed some of the fundamental rules relating to the taxation of the unincorporated business and compared the total tax paid on the profits of a business depending on the business vehicle used. We are now going to look at the tax implications of the cessation of a business.
A cessation occurs when the individual is no longer carrying on the business; the business itself may have been sold (or gifted) such that it has not ceased but is being carried on by someone else.
Choice of date of cessation
The date of cessation determines the tax year in which the business ceases and the calculation of the taxable trading profits for the final tax years under the closing year rules. A trader may be in a position to choose the most beneficial date of cessation from a tax point of view.
For example, where a taxpayer is about to sell a business and has little or no other income, it may be beneficial to carry out the sale at the start of a tax year (say, 2023/24) rather than at the end of the previous year – this would enable the offset of the personal allowance for 2023/24, which would otherwise be wasted.
The tax year in which a business is sold will also determine the availability of the annual exempt amount and, where business asset disposal relief is not available, the rate at which capital gains tax will be paid.
Trading losses on cessation
On the cessation of a business, the loss relief position is made more complicated by the availability of terminal loss relief in respect of the loss of the final 12 months of trading. Accordingly, there are two alternative reliefs available (or even three if the business is transferred to a company in exchange for shares). Each alternative may need to be considered in detail in order to determine the potential tax saving. As always, it is important to be sure of the precise income and/or chargeable gains that the losses can be offset against – and the periods in which the offset can occur.
Relieving the terminal loss
For exams in the period 1 June 2024 to 31 March 2025 you will not be required to calculate a terminal loss.
A terminal loss can be offset against trading profits of the final tax year of trading and the three preceding tax years, later years first.
Relieving a trading loss against general income and chargeable gains
Alternatively, the trading loss of the final tax year can be offset against general income and chargeable gains of that final tax year and/or the previous year.
Value added tax (VAT)
When considering the ‘tax implications’ of a particular commercial transaction or situation it is important to consider all of the possible taxes unless they are specifically excluded by the question.
On the cessation of trading a taxpayer is treated as having made a supply of all inventory, equipment and other items in respect of which input tax was claimed. The output tax in respect of this deemed supply is payable to HM Revenue & Customs unless it does not exceed £1,000.
In order to be able to deal with questions concerning the cessation of a business, you need to be very confident of your knowledge of the rules concerning the offset of trading losses.
Note: The unincorporated business is also considered in:
Written by a member of the ATX-UK examining team
The comments in this article do not amount to advice on a particular matter and should not be taken as such. No reliance should be placed on the content of this article as the basis of any decision. The authors and ACCA expressly disclaim all liability to any person in respect of any indirect, incidental, consequential or other damages relating to the use of this article.