BIM48000 - Crisis-driven changes to trading activities

Crisis situations, whether local, national or global can drive or result in change to normal patterns of trading. For example, the 2020 coronavirus pandemic resulted in some businesses changing their normal business activities by:

  • changing product lines
  • providing goods or services to key workers free or at significant discounts
  • donating supplies to charities, hospitals and care homes.

This guidance sets out how HMRC apply legislation and case law to some of these scenarios. Reference is made to specific pages in the Business Income Manual (BIM), these are to help illustrate the points made. The pages should not be read in isolation; the whole of the relevant section of the BIM should be reviewed.

Nature of trade

When a business starts carrying out an entirely new trade, completely unrelated to its previous activities, then this should normally be treated as the commencement of a separate trade (see BIM80530).

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 commencement of a separate trade. Its profits or losses should be merged with those of the existing trade.

This will depend on the relevant facts of each case (see BIM80500+). In general, it would be unusual for a company to carry on more than one trade (see BIM80535).

For example, if a restaurant business starts manufacturing gowns and face masks then this should be treated as the commencement of a separate trade. However, if a business that is already manufacturing clothing articles starts to manufacture gowns and face masks using the same staff and premises then this should be treated as an extension of the same trade and not the commencement of a new trade.

Temporary breaks in trading activity

Temporary breaks in trading activity do not amount to a permanent cessation of the trade for tax purposes. For example, if a business closed its doors to customers, or otherwise ceased trading during the coronavirus lockdown period, but intended to continue trading after restrictions were lifted, then the trade should not be treated as having ceased. Any income and expenses relating to the gap in trading will be taken account of in calculation of trade profits or losses, subject to the usual tax rules and case law.

This is dependent on the resumption of activities following the break being the same, or similar, to those prior to the break (see BIM80580).

Where a business does not in fact recommence after what was originally intended as a temporary break the date of cessation should be determined with the relevant facts in mind (see BIM38300+ and BIM80500+).

Income received

Some businesses may have sought donations of money (from the public and/or employees), enabling them to supply products or services to the value of the donations received.

Receipts intended to meet revenue expenditure, or which supplement trade income, are trade receipts (see BIM40450+ and BIM40051).

Income of a casual nature received, in return for services provided, will be taxable as miscellaneous income. Miscellaneous income is a sweep-up provision that seeks to tax income not charged elsewhere (see BIM100000+).

The trading and miscellaneous income allowance gives relief to individuals with trading and/or miscellaneous income, up a total of £1,000 (see BIM86000+). The allowance is applied once across all income the individual has from a sole trade. Where the allowance is claimed then no relief can be obtained for any expenses.

Revenue Expenditure

Revenue expenditure recognised in the trader’s GAAP-compliant profit & loss account, or brought into account under a cash basis calculation of trade profits, will be allowable as a deduction in computing taxable trade profits unless denied by specific legislation or case law.

A key consideration is whether costs have been incurred wholly and exclusively for the purposes of the trade (s34 ITTOIA 2005 & s54 CTA 2009). This a is a question of fact, to be determined by reference to the circumstances of the individual case - in particular, the aims and objectives of those responsible for deciding to commit to the expenditure (see BIM37000+ and BIM37055). We would expect this to be evidenced, for example by minutes of meetings or other supporting documents. Where the facts show that the reasons were philanthropic rather than business-focussed, the expense will be disallowable (see BIM37510).

Expenses which provide an incidental non-trade benefit are not disallowed by s34 ITTOIA 2005 or s54 CTA 2009 provided the purpose of the expenditure was to benefit the trade. However, if the facts show that achieving the non-trade benefit was a purpose (even if not necessarily a main purpose) in incurring the expenditure then the expense should be disallowed. If an identifiable part or proportion of the expenditure can be identified as incurred wholly and exclusively for the purposes of the trade, that part or proportion is not disallowed (see BIM37007).

Where a business makes a donation of goods or services you should consider the impact on the taxable trade profits. In particular:

  • while the cost of gifts and donations is generally disallowable, there are provisions that allow particular donations; and

  • gifts of trading stock may not always result in a taxable receipt.

Profit foregone on goods supplied at discount to the normal selling price should not be considered a gift if the transaction is part of the trade and the trader’s costs have been covered (see BIM45065).

Where the recipient has provided a service to the business, no deduction should be given for the gift unless it can be demonstrated the trader was under an obligation to provide it (BIM45013).

Business Entertainment and Gifts: Expenses that have been incurred wholly and exclusively for the purpose of the trade may nonetheless be disallowed on the basis that they have been incurred in providing business entertainment or gifts (see BIM45000+).

However, the costs to a business of giving away its own goods or services for the purpose of advertising to the public is not considered to be expenditure on business entertainment (see BIM45032).

Small gifts: Cost of small gifts which carry conspicuous advertising for the trader are generally allowable, BIM45070 provides detail of the exceptions to this.

Donations of stock to charities: BIM45072 provides guidance on donations to charities.

If stock is donated to a charity then the trader doesn’t have to record any receipt for the donation (s108 ITTOIA 2005 and s105 CTA 2009). This would apply if a business donated trading stock to a charity for homeless people. However, it wouldn’t apply if stock is donated to a non-charitable body, individuals or a business. In such cases, the amount which the stock would have realised if sold in the open market at the time of the disposal should be brought into the calculation of trading profits. In the exceptional circumstances of a crisis – e.g. the coronavirus ‘lockdown’ period - distribution chains, market outlets, willing buyers etc. for some types of stock will be severely disrupted: market value will have to be considered in that context.

The market value rule does not apply to services provided.

Refunds: Some businesses may offer partial refunds to customers - for example, during the coronavirus ‘lockdown’ period some businesses offered refunds on car insurance policies, gym memberships or other subscription-based services and annual policies. Where these are included as trade expenses in in GAAP-compliant accounts we would expect these amounts to be allowed. The original receipt should have also been included in the calculation of trade profits.

Medical supplies and equipment: If a company donates medical supplies or equipment, from its trading stock for humanitarian purposes it does not need to record any income for the items donated (s107 CTA 2009 and see BIM45180). This only applies to donations by companies, not sole traders or partnerships. It applies whether or not the donation is to a charity. Some companies may begin to newly manufacture, or purchase, medical supplies and equipment with a view of donating these for humanitarian purposes rather than selling them. Where such goods are of a similar class or description as the other goods already offered for sale by the company, they should be regarded as trading stock for the purposes of s107 CTA 2009. An example of this would be where a clothing manufacturer switches production to produce face masks and give these away for humanitarian purposes.

Examples of medical supplies and equipment will include face masks, gowns, hand sanitisers and ventilators. The incidental costs of packaging and distribution will also be allowable.

Staff seconded to charities and educational establishments: The employer’s costs of staff seconded to charities and educational establishments are specifically allowable as trade deductions (see BIM47120 as well as sections 70 & 71 ITTOIA 2005 and sections 70 & 71 CTA 2009). Where staff are seconded to other bodies, the costs will be allowable provided the secondment is wholly and exclusively for the purposes of the trade.