BIM90105 | Post-cessation receipts and expenses: post-cessation trade relief: reduction for unpaid trade expenses

S99 Income Tax (Trading and Other Income) Act 2005

How the reduction for unpaid trade expenses works

The principles illustrated by this example relate to post-cessation expenses incurred by individuals, trustees, personal representatives and non-resident companies subject to Income Tax only.

Reduction

Under generally accepted accounting practice (GAAP), expenses are deductible from trading profits for tax purposes at the time the liability to pay them arises, which is not the same as the date these are actually paid.

Therefore, in considering post-cessation trade relief (see BIM90100), it is appropriate that an adjustment be made for any expenses claimed as a deduction in computing trading profits, but which were unpaid at the time that the trade ceased.

This means that when applying post-cessation trade relief, the amount eligible for relief must be reduced by the amount of the expenses that are still unpaid at the end of the tax year in question. However, note that the reduction should not include any amount taken into account as a reduction in a previous tax year. This prevents a double restriction for the same expenditure.

Partnerships

Note that if the person who carried on the trade was a partner in a partnership, the unpaid expenses in question are the former partner's share of the unpaid expenses.

Subsequent payment of expenses

Any of the trade expenses paid subsequently are to be treated as a 'qualifying payment' (see BIM90110).

Example

Rex runs a nail salon. From 2016 onwards his business goes into sharp decline and he ceases trading on 12 December 2018. He makes up his accounts to the date he closed the salon, including all bills received up to that point. However, as he is unemployed after giving up the salon, he cannot afford to pay all the outstanding bills in relation to the salon. He clears most of them during 2019, but by 5 April 2020 he still owes the landlord £1,500 in back rent for the salon. He pays £1,300 on 30 September 2022, leaving £200 unpaid.

In January 2021 Rex pays £1,000 in legal fees to try to recover debts owed to him by the nail salon customers. He puts in a claim under Section 96 for those expenses, but the clawback for unpaid trade expenses applies so Rex’s claim is restricted to nil. The amount of unpaid bills left that could potentially affect future claims is reduced to £500.

When Rex pays the £1,300 rent in 2022/2023 he is treated as making a qualifying payment equal to the amount previously clawed back, less the amount of rent still owed (£1,000 - £200 = £800).