Cash basis on cessation of trade

Cash basis on cessation of trade

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I know it may be rather early to be thinking about this, but ..

Suppose that a business, which has been trading for several years, making its accounts up to 05 April each year, qualifies for and elects to use the cash basis for the 2013-14 tax year.  That business ceased to trade on 05 April 2014 having incurred a loss in that year, and with some debtors that will be paid in 2014-15.

2 issues arise
1) Can the terminal loss be carried back under s.89 ITA 2007?
2) Is there any requirement to account for the debtors (ignoring the spreading option for now), and if so what is the mechanism for reporting?

1) Terminal loss:

S.74E(2) ITA 2007 forbids the sideways relief of losses.  Interestingly it does not refer to section numbers for such claims but expressly refers to "sideways relief".  I didn't think that "sideways relief" had any statutory definition.  However I interpret it to mean relief against income other than that of the trade. That would include s.64(2)(b), s.64(2)(c) and s.72, all of ITA 2007, but NOT s.89 under which losses are relieved against profits of the same trade in a previous year.

That said, there is only one box on the self assessment tax return on which to enter a carry back of losses.  The only indication of the statutory provision under which the claim is made, would be contained in white space.

Despite that there may be a variety of carry back claims contained in that box, at least one of which is valid in law, the tax return fails online filing validation if there is any entry made in that box in the same tax return as there contains a cash basis election.

Also, just an idle thought, but what if you are a member a partnership, as well as having a sole trade.  The sole trade is on cash basis. The partnership is on GAAP.  both make a loss.  Does the online filing validation prevent you from carrying back the partnership loss?  I don't think that it should.

2) Cessation provisions generally

It might have been sensible for there to be a rule forbidding a cash basis election in the year of cessation of trade. Maybe there is such a restriction? I could not find it.  There is quite a bit of commentary on when it might be appropriate to leave the cash basis (and consequences), but cessation of trade is not mentioned in any that I have come across.  If there is such a restriction then it would render the above comments on terminal losses otiose (although not the idle thought at the end of section 1 above)

But in the absence of such a provision, it seems that, other qualifying conditions being met, a taxpayer can elect for the cash basis in the year of cessation.

The normal method of reporting leaving the cash basis would be in the following year's return, to leave the election box unticked. That box would be in the self employment pages which in this case would not be included at all in the tax return.  Those missing self employment pages would also contain the figures resulting from any adjustment.

I assume that someone as thought of all this?

With kind regards

Clint Westwood

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