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Outstanding invoices - cash basis business closing

Sole Trader closing business and opening in another country, how to deal with outstanding invoices

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Hello Experts! Hope you can help me with this one :)

Sole trader is ceasing on 28.06 as last day of working and opening business in another country the day after. Going to invoice the client after finishing the work. Its a cash basis account, does he still include the work up to 28.06 as income despite not receiving the money till 2-3 months later? The new country will also be a cash basis account and there is fear he will have to pay tax twice.

How to deal with the company assets that  were bought as UK business? He will be using the assets as a new company in the other country (laptop, printer etc.)

Thanks a milion in advance!

Replies (22)

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By Tax Dragon
11th Jun 2021 16:21

It's taxable in the UK, yes.

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By David Ex
11th Jun 2021 17:11

I think the sole trader - let's call him Wendel, for the sake or argument - should speak to an accountant (or two) to ensure that his tax affairs in the UK and in the destination country are dealt with correctly. There are any number of issues that may be relevant so definitely worth spending a small amount on fees to be free of the stress and risk associated with closing one business and opening another in a foreign jurisdiction.

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Replying to David Ex:
RLI
By lionofludesch
11th Jun 2021 18:16

David Ex wrote:
There are any number of issues that may be relevant so definitely worth spending a small amount on fees to be free of the stress and risk associated with closing one business and opening another in a foreign jurisdiction.

One might be that the destination country might not operate a cash basis. They could just use proper grown-up accruals accounting.

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Replying to lionofludesch:
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By David Ex
11th Jun 2021 19:04

lionofludesch wrote:

One might be that the destination country might not operate a cash basis. They could just use proper grown-up accruals accounting.

OP says “The new country will also be a cash basis” but whether that’s right or not is far from the only issue in the plan.

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Replying to David Ex:
RLI
By lionofludesch
11th Jun 2021 19:26

David Ex wrote:

lionofludesch wrote:

One might be that the destination country might not operate a cash basis. They could just use proper grown-up accruals accounting.

OP says “The new country will also be a cash basis” but whether that’s right or not is far from the only issue in the plan.

I took that to mean that he'll be preparing cash based accounts. Bit - hey - you're right. There are bigger issues.

What the OP needs to ask is why would HMRC surrender tax on income earned in the UK to some random foreign country just because the customer was late paying his bill?

Answer - they wouldn't. They want their tax.

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By lionofludesch
11th Jun 2021 18:14

Is this hypothetical sole trader related to you ?

Everything crystalises on the date of cessation, I'm afraid.

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Replying to lionofludesch:
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By wendel
11th Jun 2021 18:33

It’s my brother who im trying to help with closing the business, unfortunately he is going through some rough family time and neglecting the matter more than he should, so im kind trying to find out as much as i can.

Thank you all for your contribution to the discussion, much appreciated

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By Matrix
11th Jun 2021 19:09

I don’t see why he would include the UK invoice in the overseas accounts.

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Replying to Matrix:
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By David Ex
11th Jun 2021 20:16

Matrix wrote:

I don’t see why he would include the UK invoice in the overseas accounts.

If both businesses are companies, the UK invoice presumably goes nowhere near the overseas company. But then again, what’s the level of expertise of the person who will be preparing the accounts.

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Replying to lionofludesch:
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By David Ex
11th Jun 2021 20:14

lionofludesch wrote:

Is this hypothetical sole trader related to you ?

Everything crystalises on the date of cessation, I'm afraid.

If I have read all the posts, it’s not absolutely clear whether the existing and/or new businesses are sole trader or company/ies.

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Replying to David Ex:
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By Tax Dragon
11th Jun 2021 20:26

David Ex wrote:

If I have read all the posts, it’s not absolutely clear whether the existing and/or new businesses are sole trader or company/ies.

Except that the subtitle refers to sole trade. Can companies even use cash basis?

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Replying to Tax Dragon:
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By David Ex
11th Jun 2021 20:49

Tax Dragon wrote:

Except that the subtitle refers to sole trade.

And the body of the question says “How to deal with the company assets that were bought as UK business?”.

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Replying to David Ex:
RLI
By lionofludesch
11th Jun 2021 20:57

David Ex wrote:

Tax Dragon wrote:

Except that the subtitle refers to sole trade.

And the body of the question says “How to deal with the company assets that were bought as UK business?”.

You can't expect a DIYer to know everything.

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Replying to David Ex:
RLI
By lionofludesch
11th Jun 2021 20:27

David Ex wrote:

lionofludesch wrote:

Is this hypothetical sole trader related to you ?

Everything crystalises on the date of cessation, I'm afraid.

If I have read all the posts, it’s not absolutely clear whether the existing and/or new businesses are sole trader or company/ies.

Companies? Preparing cash based accounts?

Well, I suppose anything's possible for a DIY accountant.

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By wendel
11th Jun 2021 21:23

Sorry Guys maybe I made things confusing with mentioning the other country and maybe I should have phrased my questions better:

Can he make 28.06 his last day as a UK Sole Trader (he is cash basis), send invoice to his clients at the end of that day, notify HMRC he has ceased trading on 28.06, wait till the clients pay (~2 months later) and then add the income to his final tax return calculation and self-assessment (which I assume would have the deadline of 31 Jan 2023?

...Or would HMRC say that all invoices have to settled before he ceases trading? (I imagine that would be illogical, but it wouldn't be the first time by HMRC)

I guess accrual is straight-forward here because you bill on last day and that's what you add as income, but he is cash basis so not sure how to deal with it, as the cash would come in much later.

PS. I am actively looking for an accountant that would specialise in both countries' tax laws to make the transition smooth, but as you can imagine its not easy, so I wanted to ask here for initial thoughts and opinions, also out of curiosity.

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Replying to wendel:
RLI
By lionofludesch
11th Jun 2021 22:11

wendel wrote:

Sorry Guys maybe I made things confusing with mentioning the other country and maybe I should have phrased my questions better:

Can he make 28.06 his last day as a UK Sole Trader (he is cash basis), send invoice to his clients at the end of that day, notify HMRC he has ceased trading on 28.06, wait till the clients pay (~2 months later) and then add the income to his final tax return calculation and self-assessment (which I assume would have the deadline of 31 Jan 2023?

...Or would HMRC say that all invoices have to settled before he ceases trading? (I imagine that would be illogical, but it wouldn't be the first time by HMRC)

I guess accrual is straight-forward here because you bill on last day and that's what you add as income, but he is cash basis so not sure how to deal with it, as the cash would come in much later.

PS. I am actively looking for an accountant that would specialise in both countries' tax laws to make the transition smooth, but as you can imagine its not easy, so I wanted to ask here for initial thoughts and opinions, also out of curiosity.

To put my earlier post another way, accruals is mandatory on cessation. You don't have choices. You work on cash basis plus all the debtors and creditors are treated as paid on the final day.

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Replying to lionofludesch:
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By Tax Dragon
12th Jun 2021 07:18

Along with stock and WIP* (and I guess any other leftovers, like the van)? (Hugo's getting me into bad habits... thinking out loud based on what sounds logical, rather than looking up the actual rules.)

*WIP being Nil here, if it's all being billed out on the last day.

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Replying to lionofludesch:
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By frankfx
12th Jun 2021 12:59

https://www.accountingweb.co.uk/any-answers/cash-basis-cessation-of-trade

Lion,

Its like deja vu, all over again

Or

If you ask me anything I don’t know, I’m not going to answer.

Yours

Yogi Berra

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By Elena @ ESA. Ltd
12th Jun 2021 13:07

Why the UK cash basis business needs to cease its business before 5 th April?
What does the sole-trader want to achieve with this official termination?

If he stops trading, e.g. receiving Income, the termination of all suppliers' contracts would indicate the natural cease of the business, wouldn't it?

I would understand if he wanted to cease his business before or on 5th April 2021.
But he's already missed the previous YE, his next declaration is due on 31 Jan 2023 only.

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Replying to Elena @ ESA. Ltd:
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By wendel
12th Jun 2021 13:28

Assuming I understood the question right:

From what I read if you move aboard you cannot be a sole trader so it would be illegal for him to keep the business open and simply not do any work beyond 28.06. Therefore the idea of official termination.

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Replying to wendel:
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By David Ex
12th Jun 2021 15:16

wendel wrote:

From what I read if you move aboard you cannot be a sole trader so it would be illegal for him to keep the business open and simply not do any work beyond 28.06.

I don’t know what you are reading but that’s just completely untrue.

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Replying to David Ex:
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By Tax Dragon
13th Jun 2021 07:00

Untrue or not isn't the issue. (IMHO the comment timed at 13:07 on 12th June was one of the least relevant, most unhelpful comments I've seen in here. And that's against some serious competition. Much of it from me. Your 'untrue' comment is right up there too. If I was the OP, I'd ignore both.)

Someone has a UK sole trade. They go to live abroad. UK activities cease (but similar activities begin overseas). What is the UK tax treatment? It's all prescribed by UK law. OP believes there to be two trades - one in the UK and one not. Is he right? If so, there's clearly a cessation of the UK trade. When is that cessation? C'mon, if you're gonna bother to comment at least say stuff that's relevant.

Having looked at the thread Frank linked (which disagrees with Lion) and consequently at the rules, Richard (unsurprisingly) is right.

There's then a question - the question in the OP - about where post cessation receipts are taxed. Post cessation receipts of a business that had been taxable in the UK are themselves taxable in the UK. Might they also be taxable overseas (in the country of residence at the time of receipt)? You'd hope not, but it seems plausible. Hence the question.

Great job answering, one and all.

OP, to be fair to us, since we don't know where your brother is going, we couldn't answer even if we wanted to. (And I wouldn't do so even had you told us - I comment on UK tax only.) I can tell you - in fact I have told you, very first reply and again in this post and again now - that the cash receipts will be taxable in the UK. That's so even if your brother is no longer tax resident in the UK when the money comes in.

Edit: worth adding that, if there's a cessation on 28 June and money comes in afterwards and is taxable as a post cessation receipt, then it's not liable to NIC. Richard explains that. It would be so liable if you did what Lion said. Or if you, against your better judgment, didn't ignore Elena @ ESA. Ltd. So it does make a difference.

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