Changes to trading activities as a result of COVID-19

The COVID-19 pandemic and restrictions on trade have led many businesses to change what they do in a bid to survive. An example of this is the village pub opening instead as a local shop selling food and other essentials. Alternatively, a business may have ceased trading temporarily as a result of the lockdown.

HMRC have recently published guidance on the tax implications of crisis-driven changes to trading activities.

Nature of trade

When a business changes what they do, the tax implications will depend on whether the new activity is broadly similar to their previous activities or completely unrelated.

New trade

If a business has started something new which is completely different to their usual business, for example, a hairdresser starting to manufacture face masks, the business making face masks will be treated as a new separate business. The profits and losses should be calculated separately from those of the existing hairdressing business.

Existing trade

However, if a business starts to carry on a new activity that is broadly similar to its existing trade, the new activity should not be treated as a new business. Instead, profits and losses should be included when working out the profits and losses of the existing trade. An example of this would be a restaurant that instead offers a takeaway and delivery service.

Temporary break in trading

In the initial strict phase of the lockdown, many businesses were not allowed to trade. The list included those in the leisure and hospitality sector, non-essential shops, hairdressers, beauticians and barbers. As a result, the business will have a temporary break in its trade.

HMRC have confirmed that where a business closed its doors to customers or otherwise ceased trading as a result of the pandemic, the break will not be treated as a cessation of trade where the intention is to continue trading once the lockdown restrictions are lifted. However, this is conditional on the activities after the break being the same as, or similar to, those prior to the break. Any income and expenses relating to the gap in trading should be taken into account in calculating the profits or losses for the period.

Help and advice

Discuss the tax implications of any changes to or breaks in your trade with us.