Business diversification. Implications for tax

Many businesses turned chameleon during Covid-19, changing core business to adapt. But whether you're a florist making face masks or a farm shop starting home deliveries, what about tax?

If a business starts a new trade, it's normally treated as a separate trade for tax purposes. HMRC gives the example of a restaurant making gowns and face masks - something completely unrelated to previous business activity. If this reflects your business experience this year, there are key issues to consider. Are you are now running two trades rather than one? Alternatively, has your original trade ceased permanently for tax purposes? In either eventuality, there may be knock-on consequences. For income tax, the beginning or cessation of trade impacts on how profits are taxed, and when any losses qualify for relief. Considerations for companies are subtly different (see below).

If, on the other hand, a business starts a new activity, broadly similar to its existing trade, this isn't likely to be treated as the start of a separate trade. Profits or losses will be merged with those of the original trade. Think of a clothing manufacturing business starting to make gowns and face masks, using existing staff and premises, for instance.

A temporary break in trading because of lockdown won't count as a permanent cessation of trade for tax purposes. This is provided that business activity after the break is the same as, or similar to, that carried on before.

Tip: think points for companies

HMRC is likely to think of a company as carrying on only one trade . Factors which may persuade it otherwise include the fact that one activity is so different in nature from the other that it can be seen as quite separate, and that activities are separately organised and managed up to board level. Availability of loss relief may be a concern to many at present. Since April 2017 , there has been greater flexibility to relieve losses arising in different trades. Relief can however be restricted where trading has become 'negligible'. This is a technical area: please contact us to discuss specific circumstances.

Finally, don't forget VAT. Amongst other issues to watch, it's the person (natural or legal), rather than the business, that registers for VAT. So if you have diversified, you may need to review compliance. As always, we are happy to advise.

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