Chapter 15 Unincorporated businesses Flashcards
1.1 Sale to a connected party: succession election
Normally if a sole trader sells or transfers their business, P+M is deemed to be sold at MV and balancing adjustments arise. A joint election can be made to transfer at TWDV. The tax implications for the succession election is that no balancing adjustment, no WDAs, AIAs, DYAs in final period of account, elect within two years of succession date and often used on incorporation and transfer of business to a close relative.
The original owner is connected to new owner if the new owner is the original owner’s spouse, relative (or spouse of relative) of original owner and relative of original owner’s own spouse. Relatives are brothers, sisters, ancestors and lineal descendants.
The original owner and new owner are also connected if:
- One is a partnership and other has right to a share in partnership.
- One is a company and the other has control over the company.
- Both are partnerships and another person has a right to share in both partnerships.
- Both are companies and another person has control over them.
1.2 SBA
SBAs are available for eligible construction costs, incurred due to written/oral contracts on/after 29 October 2018, on new non-residential structures and buildings. SBAs are calculated separately to P+M Cas but also give an allowable deduction from trading profits or property income (if property was rented out).
2.1 Basis periods
There are 3 scenarios:
- Ongoing business: assessed on accounting period ending in tax year ‘current year bases.
- Commencement of trade: assessed using special ‘opening year rules.
- Cessation of trade: assessed using special ‘closing year rules.
Current year basis period rules will be abolished from 2024/25 and transitional rules will apply in 2023/24.
2.2 Opening year rules.
The first tax year is done on an actual basis, from the start of trade to the following 5 April.
For the second year, if there is not a POA ending in the 2nd tax year, then we continue to use the actual tax year. If not and the POA is exactly 12 months, tax that period of account. If it is less than 12 months, tax the first 12 months of trading (from date of commencement). If more than 12 months, then tax last 12 months of long POA.
For the third year onwards tax 12 months profits to accounting date in the third tax year.
2.3 Closing year of trade.
To calculate this tax all profits not yet assessed in previous years and then deduct overlap profits from commencement.
3.1 Trading losses – carry forward (s83)
Carry forward loss to offset against future available future trading profits of the same trade. You must offset as much as possible, relief is automatic, must agree amount of loss within four years of the end of the tax year of loss and the carry forward is indefinite.
3.2 Loss relief against general net income (s64)
Offset loss against general income in current year and/or previous tax year. This is an optional claim (must make an election within 12 months from 31 January following end of tax year of loss). You can elect to offset loss against both years, either year or in any order. This is an all or nothing claim.
3.3 Extension to carry back.
An extension to carry back of losses is available in the 2020/21 tax year or 2021/22 tax year. The relief is available if at least s64 net income claim has been made (loss must have already been offset against either net income in the current tax year or tax year of the loss before the loss or both). If no s64 claim could be made in either year because no income was available, the extension can be claimed.
The remaining losses can be carried back a total of three years, against trading income only and on a LIFO basis.
The £2 million cap for claims under this temporary extended claim also applies to unincorporated businesses. The cap is separate for the 2020/21 and 2021/22 tax years.
3.4 Restriction on reliefs against total income
There is a restriction on the amount by which loss reliefs can reduce other income. The limit is the greater of £50,000 and 25% of adjusted total income of the year in which the loss is being offset (total income plus payroll giving donations less grossed up personal pension contributions).
This restriction also applies to losses relieved under s72 ITA 2007 (opening year losses) as well as losses on the disposal of unquoted shares, property losses and interest on loans taken out to invest in close companies.
The restriction does not apply to losses against trading income.
4.1 Trading losses on incorporation
S83 relief requires that losses be carried forward against profits of the same trade. On incorporation of a sole trader business, s83 carry forward relief is not available which could mean accumulated trading losses would be lost at this point. S86 incorporation relief may be available to offset trading losses brought forward from the sole trader business against personal income derived from the company.
The sole trader must receive at least 80% of the consideration on incorporation in form of shares. The loss brought forward is first set against earned income from the company, then against dividend income from the company.
5.1 Anti-avoidance provisions
If a trader spends less than 10 hours per week on average running the business, loss relief under s64 or s72 (offset of losses against other income) is restricted to a maximum amount of £25,000. Any remaining losses may still be carried forward under s83.
Partners in LLPs may only claim s64 and s72 loss relief up to a maximum of their capital contributions into the partnership. Any remaining losses, in excess of their capital contributions, may be carried forward under s83.
Loss relief will not be available for offset against non-trading income or gains where the loss has arisen as a result of tax avoidance.
