Commencement and cessation refer to the start and end of a business’s trading activities. These events are critical for tax purposes, as they determine how and when income is assessed, how losses are treated, and what tax obligations must be fulfilled. Understanding the rules that apply at the beginning and end of a trade helps ensure compliance with tax laws and accurate determination of taxable income.
1. Commencement of Business
A. Definition
- Commencement: The point at which a business starts trading with the intention of making a profit.
- Not to Be Confused With: Mere preparatory or exploratory activities such as feasibility studies, renting premises, or buying equipment.
B. Tax Implications of Commencement
- Basis Period: The first basis period typically begins on the actual date trading starts.
- Opening Year Rules: Special rules determine how profits are assessed in the first few years to avoid double taxation or omission.
- Capital Allowances: Available from the start of trading on qualifying capital expenditure.
C. Pre-Trading Expenditure
- Allowable Deductions: Expenses incurred up to 7 years before commencement may be deductible if they would have been allowable had they been incurred during trading.
2. Cessation of Business
A. Definition
- Cessation: The date when the business permanently stops all trading activities with no intention to continue.
B. Tax Implications of Cessation
- Final Basis Period: Profits are assessed from the last accounting period up to the date of cessation.
- Overlap Relief: Any overlap profits (from earlier basis periods) can be relieved in the final year.
- Terminal Loss Relief: Losses in the final 12 months of trading may be carried back against profits of the previous 3 years (in reverse order).
C. Capital Allowances
- Balancing Allowances or Charges: Arise on disposal of business assets at cessation, depending on whether the sale proceeds are more or less than the tax written down value.
3. Record-Keeping and Filing Obligations
- Final Tax Return: Must be submitted for the tax year in which the business ceases.
- Notify Tax Authorities: Obligatory to inform tax authorities about the start and cessation of trade.
- Retain Records: Business records must usually be kept for a certain number of years even after cessation.
Significance of Properly Recognising Commencement and Cessation
Correctly identifying the commencement and cessation of a trade ensures accurate taxation, access to reliefs, and compliance with legal obligations. Misstating these dates can lead to incorrect assessments, penalties, or loss of tax reliefs. For businesses and tax professionals, recognising these key points in the business lifecycle is crucial for effective tax planning and administration.